IRA Tips: Tax Planning Opportunities Using IRA Accounts

IRA stands for Individual Retirement Arrangement.  IRAs can be great retirement planning tools that can also save you tax dollars.  Below are some tips so that you get the most out of your IRA contributions and the ultimate distributions from those accounts.

You can contribute up to $5,500 to a traditional IRA each year.  If you are over age 50 you can contribute an additional $1,000 each year.  Your income level may exclude you from deducting the entire contribution, but you can still contribute the entire amount.  If you are unable to take a deduction for the entire contribution, you will get credit for the non-deductible portion when you take distributions at a later date.

If you are also eligible to contribute to an employer sponsored retirement plan, you should at least contribute the amount to receive the employer match then consider if you want to contribute more to the employer plan or to your personal IRA.  Regardless of where you are contributing, it will be in your best interest to save for your retirement, as our social security system was always intended to be a supplemental income source for retirees rather than the primary source.

Once you reach age 59 ½, you can take distributions from your Traditional IRA without the IRS imposed 10% penalty.  There are exceptions for certain situations and hardships if you need to get to your funds before age 59 ½. 

Once you reach age 70 ½, you are required to start taking distributions from your Traditional IRAs.  Sometimes individuals believe that they must take a distribution of the entire account balance upon reaching age 70 ½, but this is not the case.  The IRS has table that you follow to calculate the minimum required amount you must take each year from your IRA once you are age 70 ½.

ROTH IRAs are also popular for individuals to use as retirement saving vehicles.  ROTH IRAs have the same contribution limits as Traditional IRAs but you may not be eligible to contribute to a ROTH IRA if your income level is over $194,000 for married individuals filing a joint return.  Single individuals are unable to contribute to ROTH IRAs once their income level exceeds $132,000.

ROTH IRAs do not create a tax deduction, but the income earned grows tax free and the distributions are tax free as long as you take the money out when in retirement or if you meet certain exceptions.  You do not have to take required minimum distributions at age 70 ½, so ROTH IRAs can often be passed to the next generation as a tax free investment.

There are many tax planning opportunities using IRA accounts.  When and how you contribute can save you tax dollars during your working years.  When and how you take the money out can make a difference in how much you pay tax on the accounts.  There are also many planning opportunities to use IRA accounts to leave a legacy for your loved ones.

We can assist you with IRA contribution and distribution planning.  Call us at 1-866-287-9604.

Posted by Suzan Ross, CPA/PFS/CGMA