Do you have an IRA? Are you concerned about all the laws and regulations that go along with having an IRA? The following are some areas of concern that I see people have with their IRA’s or general questions that I have seen from individuals. While this is not a full or comprehensive account of IRA’s, it is a good starting point for many.
The first major mistake people make with their IRA is that they do not contribute to it on a regular basis or in many cases they do not even have an IRA established. During the return, you get on an IRA does play a significant factor in how much money you will end up with consistent contributions will also ensure you retire with a sufficient amount. I have written that by starting an IRA in your late teens or early 20’s will benefit you greatly I am by no means downplaying that advice now. But it is a proven fact that if you start an IRA early and contribute on a consistent basis you will have a much larger pool of money to retire with. Regardless of when you start an IRA the important thing is that you start one now and contribute to it on a regular basis.
There are two common IRA’s, and they are the Traditional and ROTH. In a Traditional IRA, you are provided tax breaks in the year you make the contribution provided you meet the income guidelines. Then when you make withdrawals your entire withdrawal is taxed as ordinary income. On the other hand, a ROTH IRA is made with taxed contributions that provide no tax breaks in the year the contribution is made. Then when you make your withdrawals, the entire amount is tax-free. Both of these IRA’s allow for contributions of $5,500 a year for investors under the age of 50 and $6,500 for those over the age of 50. The IRS does change the income limitations, and contribution amounts on a regular basis so always consult a financial planner or visit the IRS website to ensure you are compliant with their regulations.
Now if you are a high-income earner and wish to have a ROTH IRA, there is a way to achieve this without causing problems with the IRS. All you need to do is make contributions that are not tax-deductible to a Traditional IRA and convert it to a ROTH. By doing this, you are making legal contributions to the IRA and making a legal conversion to a ROTH. If this is done correctly, there will be little to no tax consequences for you as the taxes have been paid, and any gains on the IRA will be mininal in nature.
A big mistake that many people make concern the required minimal distributions. These are also referred to a RMD and start when you turn age 70 ½. This is an important aspect of the IRA as of, not doing this it could cost you up to 50% of the amount that was reuired to be withdrawn from the IRA in penalties to the IRS. This will also affect beneficiaries as they will be required to make RMD’s based on their age once they receive the IRA. In these instances, it is wise to consult a financial planner to ensure you make the proper withdrawal and do so in a timely manner.
While for most of us it is not an issue to make sure, we contribute the correct amount to our IRA’s there are instances where an over contribution may occur. In many cases, it occurs when someone is making a contribution on behalf of someone else such as a spouse, and the spouse is deceased. If this does happen withdrawal the money prior to paying the taxes and there will not be an issue. If you have made a larger contribution to your own IRA you can elect to have a portion of it for the followiing year provided it was made after January 1st and prior to April 15th with proper documentation for the IRS. If you are over the age of 70 ½ and made a contibution the same applies to you as it did for the example of the deceased spouse, withdrawal the funds prior to paying your taxes.
When rolling over an IRA, we will just cut to the chase so to speak. Never roll an IRA over and have the IRA holding company issue you a check. Too many things can and do go wrong in these instances. First the IRA holding company may withhold taxes that could cause issues when you go to roll the account into another. And secondly you will only have 60 days in which to roll the funds into a new IRA. The best and safest way to roll over an IRA is to have the old IRA holding company issue the check for the proceeds directly to the new IRA holding company. That way if there are any errors it will be between the holding businesses and much easier to sort out for the IRS if that should be necessary.
Finally, it is imperative to make sure your beneficiary forms are current and up to date. Many people think that they do not need to update these as long as their will states who gets the IRA. But that is not the case as a beneficiary form will take precedence over a will. This becomes crucial when you have a life changing event such as a marriage or divorce. If you do not change the beneficiary the one who was last listed will benefit from the IRA and that may not be who you want to benefit from it. Also, by listing a beneficiary that is not a spouse will allow them to stretch the IRA over their lifetime and not limit them to five years before the entire IRA must be withdrawan.
Again, this is not mean to be a complete or comprehensive overview of IRA’s but it is some of the areas many people have questions about. If you have more questions or need, additional information feel free to contact me.
