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Category: IRA

Traditional vs. Roth IRAs

IRAs can be an important tool in your retirement savings belt, and whichever you choose to open could have a significant impact on how those accounts might grow.

 

IRAs, or Individual Retirement Accounts, are tax-advantaged accounts used to help save money for retirement. There are two different types of IRAs: traditional and Roth. Traditional IRAs, created in 1974, are owned by roughly 35.1 million U.S. households. Roth IRAs, created as part of the Taxpayer Relief Act in 1997, are owned by nearly 24.9 million households.[i]

 

Both kinds of IRAs share many similarities, and yet, each is quite different. Let’s take a closer look.

 

Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into the retirement account. Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. For individuals covered by a retirement plan at work, the deduction for a traditional IRA in 2019 has been phased out for incomes between $103,000 and $123,000 for married couples filing jointly and between $64,000 and $74,000 for single filers.[ii],[iii]

 

Also, within certain limits, individuals can make contributions to a Roth IRA with after-tax dollars. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2019, contributions to a Roth IRA are phased out between $193,000 and $203,000 for married couples filing jointly and between $122,000 and $137,000 for single filers.2,3

 

In addition to contribution and distribution rules, there are limits on how much can be contributed to either IRA. In fact, these limits apply to any combination of IRAs; that is, workers cannot put more than $6,000 per year into their Roth and traditional IRAs combined. So, if a worker contributed $3,500 in a given year into a traditional IRA, contributions to a Roth IRA would be limited to $2,500 in that same year.[i]

 

Individuals who reach age 50 or older by the end of the tax year can qualify for annual “catch-up” contributions of up to $1,000. So, for these IRA owners, the 2019 IRA contribution limit is $7,000.4

 

If you meet the income requirements, both traditional and Roth IRAs can play a part in your retirement plans. And once you’ve figured out which will work better for you, only one task remains: opening an account.

 

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

 

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

[i] https://www.ici.org/pdf/per23-10.pdf

[ii] https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-you-understand-your-tax-obligations-2018-06-14

[iii] https://money.usnews.com/money/retirement/articles/new-401-k-and-ira-limits

What Does the Required Minimum Distribution Mean?

You spent decades saving for retirement. A long time ago, you understood and took to heart the advice about the importance of your retirement savings. You’ve just turned 70, and you’re proud of your financial achievements.

You worked hard; you sacrificed, and now you’re retired and doing well enough so that you don’t have to take money from your retirement savings. After all, you’re still healthy and strong, and you’d prefer to let your retirement investments grow even more. And, besides, you don’t really need it right now.

The truth is, federal rules require you to begin making regular withdrawals from certain retirement savings accounts once you reach 70½. It’s called the Required Minimum Distribution, and it’s the minimum you have to withdraw per year. In other words, you don’t have a choice.

The RMD rule applies to certain plans.[i]

Once you reach 70½, you have to start making withdrawals from IRAs, SIMPLE IRAs, SEP IRAs, and other retirement accounts. Roth IRAs are exempt from the requirement until the account owner dies.

Here are two important provisions:

  • You may withdraw more than the minimum required amount.
  • Withdrawals are normally considered taxable income. Exceptions include money that was previously taxed (basis), is considered tax free (Roth distributions), and Qualified Charitable Distributions (QCDs).

Calculating the RMD.

You calculate the RMD for a year by dividing the account balance at the end of the preceding calendar year by the number from an IRS distribution table (“Uniform Lifetime Table”). For more information, go to https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets.

The link directs you to select between two options:

  • A worksheet to calculate your withdrawal if your spouse is more than 10 years younger than you.
  • A worksheet for everyone else.

Date to receive RMD.

The date to receive your first distribution varies depending on the type of retirement account.

For IRAs (including SEP and SIMPLE IRAs), it’s April 1 of the year following the year when you reached 70½. So, if you reach 70½ in 2019, you have until April 1, 2020.

For 401(k), profit-sharing, 403(b), and other defined contribution plans, it’s the same as mentioned above or when you retire, whichever is later.

Dates to receive successive RMDs.

You must make account withdrawals every year by December 31. The calendar year after you reach 70½ you may have to make two withdrawals, by April 1 and another by December 31. To avoid having to pay taxes on both those payments, you may take the first withdrawal in the year you reach 70½ before December 31. That way the income falls into two separate tax years.

Penalties for waiting to take withdrawals.

If you don’t take withdrawals or don’t take adequate amounts, you may face 50% excise taxes on the amounts that are not distributed.

The government may require you to report the excise tax by filing “Form 5329.” “Form 5329 instructions” provides additional information about the excise tax.

If you would like to discuss your current financial needs, we’re happy to talk. Please contact us (800) 929.1001.

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

 

[i] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

Times They Are A Changin

  • IRA

img-content-uploads-mct-height[1]Time’s have sure changed. When I was a kid, boredom was a short-lived condition. No sooner did the words come out of my mouth, “Mom, I’m bor…” Bam! I was cleaning something. After a few bouts with my bathroom, boredom wasn’t much of an issue. I got creative. Today, it seems our solution for boredom is the smartphone or the video game controller. Hmm. Nothing bad can happen there – just non social-skilled zombies with carpel tunnel. Get off your phone. Go outside. Pick up a ball and play with it. And that goes for all you kids out there, too.

So in an effort to be part of the solution, I’ve put a list together of a few practical alternatives to boredom:

1) Check your retirement accounts to make sure the primary beneficiary listed is actually the person you want it to be. You’d be surprised how many times life changes, significantly for some, but their primary beneficiary paperwork does not. Pop Quiz: Who’s currently listed as your beneficiary and will receive what could be your single largest asset after you die? Don’t know? Go find out. Go ahead. It’s that important. I’ll wait…

2) Check your life insurance policies while you’re at it. Same story here. If the name on record is not the name it should be, you need to make it right. As in right now. The pain of you dying is likely hard enough, so let’s not introduce a mess for those you’ve left behind. As I’ve said before, you can’t change it when you’re dead. With life insurance policies and retirement accounts like IRAs and 401(k)s, the beneficiary designation is the last will and testament for the account – regardless of what your will says. Yes, I’ll wait…

3) Put your phone down. Give it a rest. Go outside and shudder at the sight and warmth of that great fireball in the sky! And while you’re out there, go for a walk, hold hands with your spouse and reintroduce yourself to your kids.

4) Find a place in your community where your family can serve together. As the holidays approach, opportunities will abound to help those who might well do anything to have a little boredom in their lives. Create a legacy of service for your family and fill your hearts with the joy of serving others. Studies have shown that you learn more when you listen, and you have more when you give. In a moment of transparency, I could do both. Could you?

5) Play the animal game. Every now and again, the six of us will sit in the den and take turns imitating an animal. (I can’t help but smile as I type these words.) It’s the real deal – guaranteed to make you laugh. Helpful advice: You’d better be able to guess what animal your ultra-competitive 7-year old is or there’ll be trouble. Also popular is the Family Dance Off. Since I’m the DJ for this event, I’m mercifully exempt from the dancing. I play a song from iTunes and the person who’s “up” has to dance to it. Sometimes they get to choose their own song, sometimes they don’t. But they have to dance…or it’s off to the bathroom you go with bucket and soap in hand. Some call that “forced participation”. I call it – forced participation. And it’s money in the bank. Fun guaranteed.

6) Check your 401(k) / IRA allocations. Are you taking the appropriate amount of risk to support your family’s financial plan? Honestly, this isn’t typically a cure for boredom; it’s more of a source, really. Nevertheless, it’s a good thing to do on occasion. You don’t have to actually change your allocation – just know how you’re invested and why you’re invested that way. If you don’t know the answers to those types of questions, call me. That’s what we do.

As I said from the start, times have changed.

And they’re going to change again. Sunday morning, in fact.

This is the weekend most of the country sets our clocks back an hour. And for some, that means it will start getting dark…oh… just after lunch or so? But fear not, for boredom has his talons in you no longer! Instead, you now have the power to release the hidden animal within or to dance your way into the hearts of your family. Fire up the iTunes, Charles Henry, and put on your dancin’ shoes! Daddy’s coming home!

It may not be pretty but it beats anything you can do on a phone – other than talk to someone, but who does that anymore….uh…. boring.

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