An Individual Retirement Account (IRA) is an individual savings plan that you establish and to which you contribute. It can be a key component of your financial plan. In order to contribute to an IRA, you must receive earned income at least equal to the amount of the contribution. The contribution limit for 2018 is $5,500 for individuals under age 50, and $6,500 for those 50 and older. The contribution limit for 2019 will change from $5,500 to $6,000 however the catch-up contribution limit will remain at $1,000 so the limit for individuals 50 and older will be $7,000. In general an IRA offers two significant advantages – tax-deductible contributions and tax-deferred earnings/growth. Eligibility to deduct an IRA contribution may be modified by one’s participation in an employer-sponsored retirement plan, marital status, and modified gross income (AGI). Anyone who owns an IRA, however, can enjoy the advantages of tax-deferral. Deductible IRA assets and their earnings are not recognized as ordinary income until they are distributed to the account holder.
In 1998 Congress created the Roth IRA. This investment vehicle represents an opportunity to create tax-free income without having to invest in municipal bonds. The minimum earned income requirements and contribution limits are the same as for a traditional IRA (see above). However, contribution eligibility “phases out” based upon very specific modified AGI ranges related to your tax filing status. Participation in an employer-sponsored qualified plan is irrelevant, and contributions are not deductible.
Direct Rollover IRAs
If you leave or retire from a company that sponsors a qualified plan, you may continue to defer income taxes by executing what is known as a direct rollover to an IRA. In general, distributions paid to an employee are subject to a mandatory federal withholding of 20% if the distribution exceeds $200 for the year and is an eligible rollover distribution. Distributions that are not eligible rollover distributions are not subject to the mandatory 20% withholdings. However, if you execute a direct rollover to an IRA, there is no withholding and the IRA assets (along with earnings and growth) continue to be sheltered from recognition as ordinary (taxable) income until they are distributed.
Prior to the year in which one reaches age 70½, any individual who receives earned income may contribute to an IRA. As noted above, the contribution limit for 2018 is $5,500 for individuals under age 50, and $6,500 for those 50 and older. The contribution limit for 2019 will change from $5,500 to $6,000 however the catch-up contribution limit will remain at $1,000 so the limit for individuals 50 and older will be $7,000. The contribution cannot be made later than April 15 of the following year. That is, one may make a 2018 contribution on or after January 1, 2018, but not later than April 15, 2019.
Withdrawing from your IRA
You may begin withdrawing funds from an IRA without penalty after reaching age 59½. (Withdrawals made prior to age 59 1/2 may be subject to ordinary income tax and 10% tax penalty.) Additionally the IRS requires that you withdraw at least a minimum account - known as a Required Minimum Distribution - from your retirement accounts annually, beginning the year you reach age 70½. and each year thereafter. The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a factor in the IRS' "Uniform Lifetime" or "Joint and Last Survivor" expectancy table. Only the initial RMD may be postponed until April 1 of the next calendar year. All other RMD's must be distributed in the calendar year for which they are determined. Failure to meet the minimum distribution requirement will result in a 50% penalty in addition to any ordinary income tax liability.
At your death the assets in your IRA will pass to your named beneficiary or beneficiaries. A spousal beneficiary may keep the inherited IRA in the name of the deceased spouse or may choose to roll the assets over into his or her own IRA. In addition, as a result of the Pension Protection Act of 2006, beginning January 1, 2007, non-spousal beneficiaries may also rollover to an inherited IRA.
Please contact your financial advisor for more information about your personal retirement needs and the services we can provide to assist businesses with creating and maintaining retirement plans.