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MAXIMIZE SAVINGS & MINIMIZE TAXES WITH AN IRA Issue 3, by Milan Madhani, CPA & Vimal Madhani, MST, EA November 6th, 2015
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A Solid Retirement Savings Option
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Whatever your time horizon for retirement, the time to start saving is now. With life expectancies and inflation rising, and the liklihood of Social Security benefits declining, you may find that you need to save more aggressively than you had projected.
The Individual Retirement Account (IRA) is probably the most widely known retirement savings option. It affords you the ability to maximize your retirement savings while minimizing your taxes. It also allows you to invest your contributions in a variety of investments available through your IRA provider. Your provider then acts as the custodian of your account, investing the money as you instruct and providing updates on your account value.
To be eligible to contribute to an IRA, you must earn income, and you can’t contribute more than you earn. You are no longer able to contribute the year you reach age 70½ or after reaching age 70½, even though you may have earned income. If you are divorced, however, you can count alimony as earned income, and non-earning spouses aren’t subject to the earned-income requirement and can set up a spousal IRA. If you and your spouse both earn income, each of you may contribute to your own IRA. In addition, you may contribute to an IRA even if you are also enrolled in another kind of retirement-savings plan through your employer. |
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| A Traditional IRA is an individual retirement savings arrangement governed by Internal Revenue Code Section 408(a). Traditional IRA accounts are funded with deductible and/or non-deductible contributions based on your adjusted gross income. Participation in an employer-sponsored qualified retirement plan may also impact the deductibility of your contribution.
Traditional IRA plans are best suited for individuals who want to save for retirement on a tax-deferred basis or for individuals in high tax brackets who need a tax deduction. IRAs in combination with an employee-sponsored retirement 401(k) create a substantial platform for retirement savings. |
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Traditional IRA Considerations...
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Advantages
- Low administration cost
- Tax-deferred growth
- Possible deduction
- Creditor protection may be available
- All contributions are 100% vested
Considerations
- 10% early withdrawal penalty if younger than 59½
- Deductibility phased out depending on filing status, income level and participation in an employer plan
- Penalties for prohibited transactions
- Loans are not available
- Must have earned income and have not reached age 70½ to make contributions
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| The Roth IRA is an individual retirement savings arrangement funded with after-tax (i.e., nondeductible) contributions based on compensation and are governed by Internal Revenue Code Section 408(a). Earnings grow potentially tax-free. Unlike the Traditional IRA, a Roth IRA does not have an age restriction. Any individual with “compensation” that falls within certain income limits can contribute to a Roth IRA. Roth IRA contribution limits are not impacted if an individual is covered by an employer-sponsored plan.
Roth IRA accounts are best suited for individuals wishing to save for retirement by trading tax savings now for tax-free withdrawals later and for clients who anticipate being in a higher tax bracket upon retirement.
Advantages
- Basis can be removed at any time without tax or penalty
- No minimum required distributions for the account owner
- Low administration cost
- Potential tax-free growth
- No tax withholding unless specifically requested by account owner
- Creditor protection may be available
- All contributions are 100% vested
Considerations
- No tax deduction for contributions
- Eligibility phased out depending on filing status and income level
- Tax on earnings and possible 10% early withdrawal penalty if you are under age 59½ and have not held the account for five years
- Penalties for prohibited transaction
- Loans are not available
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| A Rollover IRA is a Traditional IRA that is often utilized by those who have changed jobs or retired and have assets accumulated in their employer-sponsored retirement plan, such as a 401(k). Deciding what to do with your retirement assets could determine whether you’ll be secure in retirement or struggle to make ends meet. Moving your 401(k) or rolling it over into an IRA account may provide you with a broader range of investment options not available in your employer 401(k). It also provides greater flexibility in ongoing asset management within an IRA.
When moving a retirement plan to an IRA, you typically will have three options:
- Leave the money with the former employer, if permitted;
- Roll over assets to the new employer; if permitted; or
- Roll over to an IRA or cash out the account value.
Each option has its own set of advantages and considerations.
Advantages of Rollover IRAs
- Keep retirement plan assets potentially growing tax-deferred
- Penalty-free early distributions prior to age 59½ for certain expenses associated with the following:
- First-time home purchases
- Qualified higher education
- Medical
- Unemployment
- Death and disability
- Avoid penalties for early distributions from employer-sponsored retirement plans
- Can subsequently roll over into new employer’s plan if permitted
- Expands investment options
- Can consolidate multiple retirement accounts for greater control
- Ability to potentially extend the life of your IRA beyond your own life and the life of your beneficiary, while still allowing your money to grow tax-deferred
Considerations
- Retirement plan share class may be less expensive than share class available to IRA holder
- Rollover may trigger new sales charge
- May delay required minimum distributions to after separation from service or age 70½, whichever is later
- May be better options for appreciated company stock
- If you plan to spend the assets between the ages 55 and 59½, the employee plan may be a better option
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| At Sentigent Financial, we understand the importance of retiring in financial dignity. We are prepared to help you find retirement solutions, such as IRAs, and look for opportunities that help ensure you don’t outlive your retirement income. Whether you’re 10 or 40 years away from retirement, there is a plan that meets you where you are.
If you already have a retirement plan in place, we can do an analysis to ensure that it’s the best fit for you based on your goals and that you’re socking away enough money to retire comfortably. After all, we know he full scope of your financial picture, which makes us equipped to address your retirement needs holistically. Plus, we are backed by HD Vest Retirement Specialists who provide technical support and specialized training to further ensure you are paired with the best solutions possible. |
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