Maybe we are just getting used to things, but it feels like we are returning to normal just a little bit. For one thing, professional sports are back on TV, kids are returning to school, and high school sports are back for the first time since March. We all have our fingers crossed that it continues. Despite all the changes, it is still important to plan to fund your retirement, and one potentially great way to do that is with the use of individual retirement accounts, or IRAs.
The individual retirement account was born in 1974 as a provision of the Employee Retirement Income Security Act (ERISA) to encourage people to save for retirement. The IRA was designed to provide tax-advantaged retirement savings, with tax-deductible contributions and tax deferred earnings. Anyone with earned income is eligible to make contributions up a limit, which is $6,000 (or 100% of earned income, whichever is lower) for 2020. Savers age 50 and older can make an additional $1000 catch-up contribution. In addition, non-working spouses can also contribute up to the same limit as the working spouse. (Source: IRS.gov)
Contributions to your IRA are always tax deductible if you (or your spouse) is not covered by a retirement plan at work. If you do have a retirement plan such as a 401k, the deductibility of your contributions will be determined by your income. For 2020, single people with income below $65,000 will be able to deduct 100% of their contributions. The deductibility phases out through $75,000 in annual income, when contributions become fully non-deductible. For married couples, the income limit for full deductibility is $104,000, phasing out through $124,000. (Source: IRS.gov)
Taxes on IRAs are deferred until distribution, then treated as ordinary income. Beginning at age 72, IRA owners will need to take a required minimum distribution (RMD) each year. This is a revision of the RMD rules and is new for 2020. However, the CARES Act, passed in March to provide relief in response to the pandemic, suspended RMDs for this year. Distributions from IRAs prior to age 59 ½ will carry a 10% penalty in addition to regular taxes, unless the distribution qualifies for an exception for death, disability, first-time home purchase, unreimbursed medical expenses, qualified higher education expenses, or a few others. Check with your tax advisor to determine if an early distribution qualifies for an exception.
Roth IRAs were created in 1998. They are similar to traditional IRAs, except the contributions are never tax-deductible. Instead, most distributions from Roth IRAs are tax-free if your account is 5 years old and you are over 59 ½. Special exceptions apply for first-time home purchases, college expenses and several other situations. Again, check with your tax advisor to determine what rules apply.
Contributions limits are the same as traditional IRAs, but not everyone with earned income may contribute. To be eligible, your income must be below $124,000 for a single person, with partial contributions allowed up to $139,000. For married people, the income limits is $196,000 with partial contributions allowed up to $206,000 in 2020. (Source: IRS.gov) Roth IRAs do not have required minimum distributions, since the withdrawal is not subject to income tax in most cases.
Individual retirement accounts can be an import part of your retirement planning. There are advantages and disadvantages to both traditional and Roth IRAs, so check with your tax and financial advisors before opening or contributing to either.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Alderfer Bergen & Co. and LPL Financial do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
The content provided herein is based on our interpretation of the CARES Act and is not intended to be legal advice or provide a tax opinion. This document is a summary only and not meant to represent all provisions within the CARES Act.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax free. Withdrawals of earnings prior to 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10-percent IRS penalty tax. Limitations and restrictions may apply.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to 59 ½ may result in a 10-percent tax in addition to current income tax.
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