Traditional IRAs—Forgotten, But Not Gone

With the number of financial products available in today’s retirement savings marketplace, the traditional Individual Retirement Account (IRA) can get easily overlooked, despite the potential for tax deferral and income tax deduction for individuals under the age of 70½. Here are some categories of savers who may benefit from a traditional IRA retirement savings account:
Individuals without a retirement plan. Single taxpayers who are not part of an employer-sponsored retirement plan (e.g., 401(k) plan) may benefit the most from using a traditional IRA. The same holds true for married taxpayers whereby neither spouse is a participant in an employer-sponsored retirement plan. Each individual can then contribute up to $5,500 in 2018 ($6,500 for individuals who are age 50 and older) annually to an IRA without meeting any income eligibility requirements, and may deduct their entire contribution for income tax purposes.
Some individuals covered under an employer-sponsored plan. Any individual who is a participant in an employer-sponsored retirement plan may contribute up to $5,500 in 2018 ($6,500 if age 50 and older) to an IRA, but whether or not that contribution can be deducted for income tax purposes depends on the taxpayer’s adjusted gross income (AGI). Deductions in 2018 phase out for single filers with modified AGIs (MAGIs) between $63,000 and $73,000, and for married couple joint filers with MAGIs between $101,000 and $121,000.
Working children. One commonly overlooked savings opportunity is for a working child to start making contributions to his or her own IRA. Many high school- and college-aged students work part-time during the summer, school vacations, and even the school year. In addition to instilling excellent saving habits, contributing to an IRA at an early age can give a child a significant head start in saving for retirement.
Individuals who are retiring or changing jobs. An IRA can allow an individual who is retiring to postpone taxation of his or her retirement plan proceeds. Likewise, an IRA can achieve similar tax benefits for individuals who are changing employers. A special type of traditional IRA—the rollover IRA—is used to accept the plan proceeds upon termination of employment. When properly executed, a rollover IRA avoids current income taxation, any unnecessary withholding of taxes by the former employer, and the 10% Federal income tax penalty for early withdrawals. It also allows the IRA owner to actively manage his or her IRA assets.
In addition to rolling over your 401 (k) to an IRA there are other options. Here is a brief look at all your options. For additional information on what is suitable for your particular situation, please consult us.
• Leave money in your former employer’s plan, if permitted. The pros: You may like the investments offered in the plan; there may not be a fee for leaving money in the plan; and it is not a taxable event.
• Roll over the assets to your new employer’s plan, if one is available and it is permitted.The pros: Keeping all your money together as a larger sum working for you. It is also not a taxable event. The con: Not all employer plans accept rollovers.
         • Cash out the account. The cons: This is a taxable event and there is loss of investing potential. It is             also costly for young individuals under 59½ and there is a penalty of 10% in addition to income taxes.
Non-spousal beneficiaries of an existing IRA. Since 2010, non-spousal beneficiaries are permitted to directly roll over funds inherited from employer-sponsored retirement plans into inherited IRAs. According to the IRS, retirement plan distributions to a non-spouse beneficiary are subject to many of the same rules that apply to other eligible rollover distributions. Retirement plan sponsors must offer a non-spouse beneficiary the option of making a direct rollover, or a trustee-to-trustee transfer, of eligible rollover distributions to an inherited IRA. This means the transfer is made from the retirement plan to the IRA, and not to the beneficiary. The non-spouse beneficiary may also have the option to leave the money in the qualified plan. Both qualified retirement plans and IRAs typically involve fees, expenses, and services that should be compared when considering a qualified plan rollover.
What about the Roth IRA?
While income taxes are due when IRA distributions are taken, Roth IRA contributions are made with after-tax dollars and earnings accumulate tax free. In contrast to the traditional IRA, Roth IRAs have neither an age limit for contributions nor minimum distribution requirements. However, both traditional and Roth IRAs have a minimum age for distributions: 59½.
Does the Roth IRA eliminate the need for a traditional IRA? Well, that depends on the situation. It is possible for some taxpayers to be eligible for and contribute to both a Roth IRA and a traditional IRA. It is important to note, however, that the IRA contribution limit ($5,500 in 2018 or $6,500 for those age 50 and older) applies to the total of all IRAs that a person may hold in a given tax year.
Is the Traditional IRA an Option for You?
When determining if an IRA is appropriate for your situation, you need to evaluate the following: 1) whether you are eligible to make a deductible contribution; 2) if comparable savings opportunities exist elsewhere (e.g., your employer-sponsored 401(k) plan); and 3) the current and long-term tax benefits.
Traditional IRAs may have been overlooked as viable retirement savings vehicles in recent years, but may still serve a valuable purpose for your unique financial situation. Be sure to consult a qualified financial professional to help you determine your retirement savings opportunities, and formulate your savings strategy for the future.

 

2018-05-14T18:04:56+00:00 May 14th, 2018|