One of the most important features of your individual retirement account (IRA) is that it is an “individual” account. You can customize your deposits and make withdrawals whenever you want, and you are responsible for paying taxes on distributions. You can even control what happens to him after your death.
If you want to take advantage of all that your IRA has to offer, read on for some little-known features that will help you get the most out of your contributions.
- You can have multiple Traditional and Roth IRAs, but your total cash contributions cannot exceed the annual maximum, and your investment options may be limited by the IRS.
- IRA losses may be tax deductible.
- Minimum Required Distributions (RMDs) must be taken from traditional IRAs once you turn 72, but you can choose which accounts to take them from.
- Anyone who has earned income can contribute to a traditional IRA, regardless of age.
- There is also no age limit for contributing to a Roth IRA.
1. It’s okay to have more than one IRA
It is possible to end more than one IRA for a number of reasons. Here are some examples:
- You had an existing Roth IRA and then rolled over an old 401 (k) to a traditional IRA.
- Your adjusted gross income (AGI) increased to the point where you were no longer eligible to contribute to your Roth IRA, so you opened a traditional IRA.
- He inherited an IRA and already had one of his own.
- He kept his Roth IRA and opened a traditional IRA to take advantage of tax deductions.
You can contribute to as many IRAs as you want, but the total you can deposit into all IRAs is limited to the annual maximum. The maximum annual contribution for 2020 and 2021 is $ 6,000, or $ 7,000 if you are 50 years or older (contribution limits for 2020 remain the same).So if 42-year-old Bob deposits $ 2,000 into his traditional IRA, he can’t contribute more than $ 4,000 to his Roth account during the same year.
2. Contributions to regular IRA accounts must be in cash
When you make your regular contribution to your IRA during the year, you must do so in cash.This limitation does not apply to the distribution of securities that are refinanced, since generally these must be renewed in kind.
3. Losses may be tax deductible.
One of the main advantages of an IRA account is the ability to defer taxes on income and investment income. You cannot use the losses within the IRA to offset the gains, but if you distribute the full balance of your traditional IRA and the amount is less than your base in the account, you can deduct that loss.
More specifically, the Internal Revenue Service (IRS) allows you to deduct losses in a traditional IRA, but with a few caveats. Suppose you have completely withdrawn all funds from all your Traditional, SEP, and SIMPLE IRAs during the year, and the total base amount is less than the total amount distributed. After you’ve combined the loss with other miscellaneous deductions, you can only deduct the amount that exceeds 2% of your AGI.
“The same rule applies to Roth IRAs,” says Curt Sheldon, CFP®, EA, AIF®, president and principal planner of CL Sheldon & Company, LLC, Alexandria, Va. “Once all Roth IRAs are emptied (all funds are distributed) you can deduct losses up to the dollar amount of your contributions (base).”
4. You don’t have to take RMD from all of your IRAs
Traditional IRA owners must begin receiving required minimum distributions (RMDs) by April 1 of the year after they turn 72.The minimum amount distributed is based on the account balance as of December 31 of the previous year and the life expectancy of the owner. For each year thereafter, the RMD must be withdrawn.
If you have multiple traditional IRAs, you don’t have to take RMDs from all of them. You can combine the total RMD amounts for each of your IRAs and take the total for an IRA or a combination of IRAs. You may prefer, for example, to liquidate investments in one IRA over investments in another.
A spouse beneficiary can claim an inherited IRA as their own and make new contributions to the account and control distributions.
5. Different rules governing spousal and non-spousal beneficiaries
One of the benefits of owning an IRA is the ability to transfer funds directly to beneficiaries without going through an estate. Beneficial spouses can claim inherited IRAs as their own, a flexibility that allows a spouse to make new contributions to the inherited IRA and control distributions.
“A spouse has many options when inheriting an IRA,” says Jillian Nel, CFP®, CDFA, director of financial planning, Inscription Capital LLC, Houston, Texas. “They can turn it into their own IRA or into a beneficiary-designated IRA. The latter would occur if the spouse is under the age of 59½ and needs to withdraw money for any reason. A beneficiary account would avoid the 10% penalty due on IRA distributions to homeowners under age 59½. “
Non-spousal beneficiaries cannot treat inherited IRAs as their own. They cannot add more and must fully liquidate the account within five years of the owner’s death or distribute the amounts over their life expectancies. Generally, the distribution options available depend on the age at which the IRA owner dies.Keep this in mind if you plan to leave the IRA assets to your children or grandchildren.
6. You can roll over or roll over your IRA
It is common for people to move accounts from one financial institution to another. If you decide to keep the same type of IRA account with a different company, you can move the assets as a transfer or as a rollover.
With a transfer, assets are turned over directly from one financial institution to another and transactions are not reported to the IRS. “When you move funds in your IRA, you can make a direct transfer from one financial institution to another any number of times a year.Note that each business may have its own account setup and closing fees, as well as an annual fee, so keep these fees in mind when making changes to the firm, ”says Rebecca Dawson, financial advisor in Los Angeles, California. .
A rollover involves taking a distribution of the assets for yourself and rolling the amount back within 60 days.“When a group retirement plan like a 401 (k) is rolled over to an IRA, if the roll over is done the right way, it can preserve some of the benefits of the 401 (k) plan. That’s why it may make sense to convert the 401 (k) into a transferable IRA rather than a contributory IRA, ”says Kirk Chisholm, Director of Innovative Advisory Group in Lexington, Mass.
You can also go the other direction and roll over your IRA assets to a 401 (k) plan. However, the plan must allow this and would determine if the transfer can be made as a 60-day transfer or if the funds must be paid directly to the plan.One reason to do this: protect those IRA assets from RMDs. Funds in the 401 (k) where you currently work are not subject to RMD when you turn 72, but money in a traditional IRA will be.Don’t pay taxes on the money if you don’t need to withdraw it for living expenses. Check with a tax advisor to make sure you made the transfer on time according to IRS regulations.
If you’re still working when you approach age 72, protect the money in your traditional IRAs from required minimum distributions by rolling those funds into your 401 (k) at that employer if your plan allows it.
7. Your IRA can be an annuity
Your annuity can operate under the same rules as an IRA if the financing vehicle is an individual retirement annuity. One benefit is that annuity policies are designed to provide retirement income for life.
8. IRAs can be managed accounts
Brokerage accounts allow you to give your financial advisor written authorization to make investment decisions and routine transactions without notifying you first. A flat fee is often charged for managing the account. This type of activity is allowed for IRAs, provided your broker has an agreement with you to allow such actions.
“I am a true advocate for the professional management of large IRA accounts. A quality investment advisor can create a low-cost, custom portfolio and monitor it for necessary changes, “says Dan Danford, CFP®, founder and CEO of the Family Investment Center in St. Joseph, Missouri.” They can draw on thousands of proven investment options and adjust to changes in their situation, product innovations or changes in the economy. ”
“As a professional,” Danford adds, “it worries me when retirees have a large portfolio and are looking to save money on their own. I’ve seen bad results many times. For most people, it’s silly.”
9. Investment options may be limited
The IRS limits the types of investment that can be held in an IRA, but your financial institution may have additional asset restrictions. The IRS allows some gold and silver coins, for example, but most financial institutions do not. Similarly, some mutual fund companies do not allow individual shares to be held in their IRA accounts.
10. Age is just a number, mainly
Anyone of any age who is paid wages, tips, or hourly wages for their job (earned income) can contribute to a traditional IRA, including minors. This means that your children can start saving for retirement as soon as they get their first job. An IRA is a great option for children who earn more than they intend to spend because it allows for long-term tax-deferred savings.
“When you start investing, it outweighs what you invest,” says Michelle Buonincontri, CFP®, CDFA ™, financial advisor based in Phoenix, Arizona. “If you have income, starting an IRA as a teenager, preferably a Roth IRA, is a great idea. You can have a significant impact on your retirement savings by harnessing the power of compound interest. ”
The tax penalty for early distributions will encourage your children to defer paying IRA distributions while offering them the ability to use college funds or up to $ 10,000 to purchase their first home without penalty. It also teaches your kids the value of investing at a young age.
Seniors can continue to contribute to Roth IRAs as long as they have earned income. This is an excellent money account that will eventually go down as an inheritance. Previously, seniors couldn’t make IRA contributions to traditional IRAs after age 70½, but following the passage of the SECURE Act of 2019, contributions can now be made at any age as long as the person has income . There are no longer age limits for making contributions to traditional IRAs.
The bottom line
IRAs have flexibility built in. Understanding how the various features work can help you tailor your retirement savings to meet your needs. If you are looking for more information on where to start, look for the best IRA brokers.