IRA Insights: Take-Aways From a Recent Webinar

 I recently attended a webinar about individual retirement accounts (IRAs) and income taxes that was sponsored by the Financial Planning Association (FPA). The speaker was Ed Slott, a leading national authority on IRAs who is widely quoted in financial publications for professionals and consumers. Ed and two of his staffers answered dozens of questions live and via the online chat.

Below are six key take-aways:

Tax Season Never Ends- Most people think they are done with taxes on April 15. That may be true for tax return preparation, but not for tax planning. Tax planning is an ongoing process throughout a taxpayer’s lifetime and beyond (i.e., tax-deferred accounts inherited by beneficiaries).

Many People Have a “Tax Problem”- There is more than $40 trillion invested in tax-deferred retirement savings accounts. Once account owners reach age 73, they must start taking required minimum distributions (RMDs). These withdrawals are taxed as ordinary income, which can push them into a higher marginal tax bracket.

The 10-Year Rule- This rule applies to most non-eligible designated beneficiaries (e.g., adult children, grandchildren, and non-spouse individuals) who inherit a tax-deferred retirement account, such as a traditional IRA or 401(k), when the original account owner passed away after 2019. This rule took effect as a result of the SECURE Act. The entire inherited account must be fully distributed by December 31 of the 10th year following the year of the original owner’s death.

The “At Least As Rapidly” Rule- This is an additional guideline for inherited tax-deferred accounts that applies when account owners of a tax-deferred retirement account, such as a traditional IRA, pass away after beginning their RMDs. If the original account owner had already started RMDs before passing, the beneficiary must continue withdrawing RMDs each year during the 10-year period, thereby making withdrawals at least as rapidly as the original owner was required to.

No Extension on the 10-Year Rule- There was a five-year delay in IRS clarification about exactly how withdrawals under the 10-Year Rule must be taken by non-eligible designated beneficiaries. This did not, however, extend the ten-year window to deplete an inherited account. For example, if an account owner died in 2022, the ten-year period is 2023 to 2032, and the account must be fully withdrawn by December 31, 2032. RMD penalties for non-spouse beneficiaries are now in effect. The penalty is 25% of the amount that should have been withdrawn but was not.

Tax Laws Are Transitory- Mr. Slott noted that tax laws “are always written in pencil” and are subject to change. A big unknown right now is the future of the Tax Cuts and Jobs Act (TCJA), which is set to expire at year-end. If the TCJA is left to expire, marginal tax rates will revert to higher rates that were in effect in 2017. Slott advised the audience to “always pay taxes when rates are the lowest” and to take a long view and consider, not only current year taxes, but taxes in the future.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

IRA Basics for Retirement Savers

While taxpayers have until the tax filing deadline in April 2023 to contribute to an individual retirement account (IRA) for 2022, many people prefer to make all of their current year tax-saving moves before year-end. This leaves about two months to make an IRA deposit during the 2022 calendar year or up to six months if you wait until April.

Below is a discussion of IRAs and details about how they can lower your taxes and provide a retirement savings nest egg:

Description- An IRA enables workers with earned income (salary from a job or net earnings from self-employment) to save and invest for retirement. IRAs are not an investment, per se, but, rather, a special classification for tax purposes.  The actual investment can be in stocks, bonds, certificates of deposit, mutual funds, or virtually any security except one that is already tax-exempt (e.g., municipal bonds or bond funds).

History- In the early 1980s, federal legislation created a tax-deductible IRA for anyone with earned income. Significant changes in 1986 established income limits for participants in an employer-sponsored retirement plan that eliminated the tax deductibility of traditional IRA contributions for some people. The Roth IRA became available January 1, 1998. While contributions are not tax-deductible, Roth IRAs provide federal income-tax-free growth.

Contribution Limits- Federal tax law limits 2022 contributions to either a traditional or Roth IRA to $6,000 for a worker with earned income. An additional $6,000 can also be saved for a worker’s spouse (in a Spousal IRA), regardless of whether or not the spouse is employed. In addition, workers or spouses who are age 50 or older can make an additional $1,000 catch-up contribution ($7,000 total).

Account Custodians- IRA account custodians include banks, credit unions, brokerage firms, and mutual fund investment companies. Minimum deposits required to set up an IRA vary with the financial institution and type of investment that is selected. For example, a bank may require $500 to purchase a CD for an IRA and a mutual fund company may require a $1,000 minimum deposit.

Account Set-Up- It is easy to set up an IRA. Simply, choose the custodian where you want to open an IRA account, fill out an application, designate one or more beneficiaries, and make an opening deposit. Many mutual fund families require lower deposits for IRAs than for taxable accounts. IRAs that let investors choose among different types of investments are known as “self-directed” IRAs. Costs for IRAs, including initial fees and annual maintenance fees, can vary so it is important to shop around. 

Income Limits-     There are a number of 2022 income limits with respect to IRAs that taxpayers must pay attention to:

*  Roth IRAs are fully available to joint filers whose current adjusted gross income (AGI) is less than $204,000. There is a phase-out range between $204,000 and $214,000. Roth IRA deposits cannot be made if AGI exceeds $214,000.

*  Roth IRAs are fully available to single filers whose AGI is less than $129,000. No participation is allowed if AGI is more than $144,000. The phase-out range is between $129,000 and $144,000.

*  A working spouse who is not covered by an employer-sponsored plan may have a fully deductible Traditional IRA, even if his/her spouse participates in an employer-sponsored plan, if the household AGI is less than $204,000. The phase-out range is from $204,000 to $214,000.

* The maximum annual AGI for a traditional IRA, under which single filers can qualify for a full tax deduction, is $68,000 in 2022 with a phase-out range of $68,000 to $78,000. For married couples filing jointly, the income limit for a full IRA deduction is $109,000 with a phase-out range of $109,000 to $129,000.

Income Uncertainty Delay- Taxpayers who are uncertain about whether or not their 2022 income will exceed the Roth IRA contribution limit may want to wait until their income for the year (including investment account dividend and capital gain distributions) is confirmed sometime in early 2023. Otherwise, they run the risk of having to make an “excess contribution withdrawal” of an unwarranted deposit by the tax filing deadline or October 15 if they file for an extension.

No Income Uncertainty Delay- Taxpayers who know that their 2022 income will not exceed the Roth IRA contribution limit should consider making an IRA deposit early in each tax year. The earlier in each tax year that money is deposited in an IRA, the longer it will have to grow through compounding.

IRA Returns- Returns on IRA accounts depend on the securities selected and on the condition of financial markets over time. In addition, returns depend on whether a commission (load) is paid or if there is no commission (no-load fund) and the amount of annual management fees that are charged.

For additional information about IRAs, review this U.S. Securities and Exchange Commission website.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.