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Traditional vs. Roth IRA

Brent E Chavez

Traditional vs. Roth IRA

Do you know the difference?

Traditional Individual Retirement Accounts (IRA), which were created in 1974, are owned by roughly 33.2 million U.S. households. Roth IRAs, however, were created as part of the Taxpayer Relief Act in 1997, are owned by nearly 22.5 million households.1

Both are IRAs. And yet, each is quite different.

Know the limits. Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into the account. Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10-percent federal income tax penalty. Remember, under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Additionally, you may continue to contribute to a Traditional IRA past age 70½, under the SECURE Act, as long as you meet the earned-income requirement.

Filing single. For singles, the maximum tax-deductible contribution starts shrinking once your modified adjusted gross income (MAGI) reaches $65,000. Singles with adjusted incomes of $75,000 and above are not eligible for a tax deduction.2

Filing jointly. For those who are married and filing jointly, things are a bit more complicated. If you or your spouse makes an IRA contribution that is covered by a workplace retirement plan, the deduction begins phasing out when your adjusted gross income is at $104,000, and it disappears at $124,000. However, if you do not have a workplace plan, but your spouse does (or vice versa), the 2020 limit starts at $196,000, and no tax deduction is allowed once the contributor’s income reaches $206,000.

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 59½.3

Income impacts total contributions. 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.

Contribution limits. In addition to distribution rules, there are limits on how much can be contributed each year 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, their contributions to a Roth IRA would be limited to $2,500 during that same year.4

Catch-up contributions. Individuals who reach age 50 or older by the end of the tax year can qualify for “catch-up” contributions. The combined limit for these is $7,000.5

Let’s chat. When it comes to picking an IRA, both traditional and Roth IRAs may play an important role in your retirement strategy. If you have any questions, let’s chat soon about how these products may be a good fit for your goals.

No need to come to the office – you can set an online initial consultation with us!

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Citations
1 – irs.gov/retirement-plans/individual-retirement-arrangements-iras, [01/09/2020]
2 – irs.gov/retirement-plans/ira-deduction-limits, [12/20/2019]
3 – irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan [01/08/2020]
4 – irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits [02/07/2020]
5 – Internal Revenue Service, 2019. The Tax Cuts and Jobs Act of 2017 eliminated the ability to “undo” a Roth conversion.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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That First Distribution from Your IRA

Brent E Chavez

That First Distribution from Your IRA

What you need to know.

When you are in your seventies, Internal Revenue Service rules say that you must start making withdrawals from your traditional IRA(s). In I.R.S. terminology, these withdrawals are called Required Minimum Distributions (RMDs).1

Generally, these distributions from traditional IRAs must begin once you reach age 72. The money distributed to you is taxed as ordinary income. (When such distributions are taken before age 59½, they may be subject to a 10% federal income tax penalty.)1

If you fail to make these withdrawals or take out less than the required amount, the I.R.S. will notice. In addition to owing income taxes on the undistributed amount, you will owe 50% more. (This 50% penalty can be waived if you can show the I.R.S. that the shortfall resulted from a “reasonable error” instead of negligence.)1

Many owners of traditional IRAs have questions about these IRA distributions and the rules related to them, so let’s answer a few.

When is the deadline for your initial IRA distribution? It must be taken by April 1 of the year after the year in which you turn 72. So, if you turn 72 in 2020, your first distribution from your traditional IRA has to occur by April 1, 2021. All the distributions you take in subsequent years must be taken by December 31 of each year.1

The starting age for these distributions has changed from 70½ to 72 due to a new federal law, the Setting Up Every Community for Retirement Enhancement (SECURE) Act. IRA owners born on or after July 1, 1949 are now scheduled to take initial IRA distributions after they turn 72.2

Is waiting until April 1, 2021 a bad idea? Maybe. While the I.R.S. allows you three extra months to take that initial IRA distribution, putting off the withdrawal could bring on a tax issue. These distributions are taxable in the year that they are taken. If you postpone the initial distribution slated for 2020 into 2021, then the taxable portions of both your first mandatory IRA distribution (deadline: April 1, 2021) and your second mandatory IRA distribution (deadline: December 31, 2021) must be reported as income on your 1040 form for 2021.1

A hypothetical example: James and his wife Stephanie file jointly, and together they earn $168,400 in 2020 (the upper limit of the 22% federal tax bracket). James turns 72 in 2020, but he decides to put off his first IRA distribution until April 1, 2021, so that means he must take two IRA distributions before 2021 ends. His 2021 taxable income jumps as a result, and it pushes the pair into a higher tax bracket. The lesson: if you will be 72 by the time 2020 ends, take your initial distribution by the end of 2020 – or risk potentially higher taxes.1,3

How do I calculate my first IRA withdrawal? If your IRA is held at one of the big investment firms, it may calculate the withdrawal amount for you and offer to route the amount into another account of your choice. It will give you and the I.R.S. a 1099-R form recording the distribution, and the amount of it that is taxable.5

Otherwise, I.R.S. Publication 590 is your resource. You calculate the amount of the distribution using Publication 590’s life expectancy tables, and your IRA balance on December 31 of the previous year. If you Google “how to calculate your required IRA distribution,” you will see links to worksheets at irs.gov and a host of other free online calculators.1,4

If your spouse is more than 10 years younger than you and is designated as the sole beneficiary for a traditional IRA that you own, you should use the I.R.S. IRA Minimum Distribution Worksheet (downloadable as a PDF) to help calculate your distribution.6

Can I take my IRA distribution in increments? Yes, if time permits. Your IRA custodian may be able to schedule these incremental withdrawals for you, perhaps with taxes withheld.7

What if I have more than one traditional IRA? You can figure out the total mandatory distribution by separately calculating the distribution for each of your traditional IRAs. You can take the total distribution amount from a single traditional IRA or multiple traditional IRAs.1

What if I have a Roth IRA? You don’t need to make mandatory IRA withdrawals from a Roth IRA if you are its original owner. Only inherited Roth IRAs require these withdrawals.1

Be proactive. Delaying your first IRA distribution until 2021 could mean higher income taxes in 2022.

Citations
1 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions [2/7/20]
2 – forbes.com/sites/kristinmckenna/2020/01/10/you-can-now-take-required-minimum-distributions-at-72-but-should-you [1/10/20]
3 – nerdwallet.com/blog/taxes/federal-income-tax-brackets/ [2/5/20]
4 – google.com/search?client=firefox-b-1-d&q=how+to+calculate+your+required+IRA+distribution [2/10/20]
5 – finance.zacks.com/everyone-ira-1099r-4710.html [3/6/19]
6 – irs.gov/pub/irs-tege/jlls_rmd_worksheet.pdf [2/10/20]
7 – fidelity.com/viewpoints/retirement/smart-ira-withdrawal-strategies [1/27/20]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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A Retirement Fact Sheet

Brent E Chavez

A Retirement Fact Sheet

Some specifics about the “second act.”

Does your vision of retirement align with the facts? Here are some noteworthy financial and lifestyle facts about life after 50 that might surprise you. 

1. Up to 85% of a retiree’s Social Security income can be taxed. Some retirees are taken aback when they discover this. In addition to the Internal Revenue Service, 13 states currently levy taxes on some or all Social Security retirement benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. (West Virginia, incidentally, is phasing out such taxation.)1

2. Retirees get a slightly larger standard deduction on their federal taxes. Actually, this is true for all taxpayers aged 65 and older, whether they are retired or not. Right now, the standard deduction for a single filer in this age bracket is $14,050, compared to $12,400 for those 64 or younger.2

3. Retirees can still use IRAs to save for retirement. There is no age limit for contributing to a Roth or Traditional IRA, as long as the owner earns income. So, a retiree can keep directing money into a Roth or Traditional IRA for life, provided they are not earning too much. 3

4. A significant percentage of retirees are carrying big debts. Looking at data from the Federal Reserve’s triennial Surveys of Consumer Finances, the median debt of senior households (age 65+) has more than doubled since the start of the century.4

The most stressful debt for seniors, according to a 2019 study from Ohio State University researchers, is credit card debt. The study calculates that each new dollar of credit card debt taken on by a senior household creates financial stress approximating an additional $14-20 of home loan debt.4

Moreover, a sudden financial liability may delay retirement. Another 2019 study, co-authored by researchers from the Urban Institute and the Congressional Budget Office, looks at the potential impact of a new $10,000 debt on an individual between 55-70 years old carrying the median amount of credit card debt for their age. The researchers concluded that this jump in debt would make a baby boomer 9% more likely to put off retiring.4

5. Fewer seniors live alone than you may think. The Administration for Community Living (a federal agency) says around 14% of older adults (65+) live by themselves. With millennials living at home and blended and extended families becoming common, perhaps this is not so surprising. The ACL does note that nearly half of women older than age 75 are on their own.5

6. Just 15% of women say they have a retirement strategy set down in writing. This factoid comes from the 2019 Transamerica Retirement Survey of American Workers. Another 42% say they have unwritten strategies. The remaining 43%? No strategy at all.6

7. Few older Americans budget for travel expenses. While retirees certainly love to travel, a Merrill Lynch study says that only about a third of people aged 50 and older earmark funds for their trips.7

What financial facts should you consider as you retire? What monetary realities might you need to acknowledge as your retirement progresses from one phase to the next? The reality of retirement may surprise you. If you have not met with a financial professional about your retirement savings and income needs, you may wish to do so. When it comes to retirement, the more information you have, the better. 

Are you ready to get your retirement plan in place? Schedule a consultation with us today to get started:

Schedule A Consultation

Citations
1 – aarp.org/retirement/social-security/questions-answers/how-is-ss-taxed.html [4/9/19]
2 – efile.com/tax-deduction/federal-standard-deduction/ [12/4/19]
3 – investopedia.com/articles/retirement/09/over-70-retirement-plans.asp [11/13/19]
4 – nextavenue.org/retirement-older-americans-debt/ [8/9/19]
5 – forbes.com/sites/howardgleckman/2018/05/04/a-new-snapshot-of-older-adults-in-the-us/ [5/4/18]
6 – transamericacenter.org/docs/default-source/women-and-retirement/tcrs2019_op_women_and_retirement_fact_sheet.pdf [11/19]
7 – kiplinger.com/article/retirement/T037-C032-S014-5-surprising-facts-to-know-about-retirement.html [11/11/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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The Major Retirement Planning Mistakes

Brent E Chavez

The Major Retirement Planning Mistakes

Why are they made again and again?

retirement mistakes, warning sign

Much is out there about the classic financial mistakes that plague start-ups, family businesses, corporations, and charities. Aside from these blunders, some classic financial missteps plague retirees.   

Calling them “mistakes” may be a bit harsh, as not all of them represent errors in judgment. Yet whether they result from ignorance or fate, we need to be aware of them as we plan for and enter retirement.        

1. Leaving work too early. As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for higher retirement income. Filing for your monthly benefits before you reach Social Security’s Full Retirement Age (FRA) can mean comparatively smaller monthly payments. Meanwhile, if you can delay claiming Social Security, that positions you for more significant monthly benefits.1     

2. Underestimating medical bills. In its latest estimate of retiree health care costs, the Center for Retirement Research at Boston College says that the average retiree will need at least $4,300 per year to pay for future health care costs. Medicare will not pay for everything. That $4,300 represents out-of-pocket costs, which includes dental, vision, and long-term care.2     

3. Taking the potential for longevity too lightly. Actuaries at the Social Security Administration project that around a third of today’s 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the relatively brief ones of our parents.3

4. Withdrawing too much each year. You may have heard of the “4% rule,” a guideline stating that you should take out only about 4% of your retirement savings annually. Many cautious retirees try to abide by it.

So, why do others withdraw 7% or 8% a year? In the first phase of retirement, people tend to live it up; more free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly.         

tax efficiency, budgeting, planning

5. Ignoring tax efficiency & fees. It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming your retirement will be long, you may want to assign this or that investment to its “preferred domain.” What does that mean? It means the taxable or tax-advantaged account that may be most appropriate for it as you pursue a better after-tax return for the whole portfolio.

Many younger investors chase the return. Some retirees, however, find a shortfall when they try to live on portfolio income. In response, they move money into stocks offering significant dividends or high-yield bonds – something you might regret in the long run. Taking retirement income off both the principal and interest of a portfolio may give you a way to reduce ordinary income and income taxes.   

6. Avoiding market risk. Equity investment does invite risk, but the reward may be worth it. In contrast, many fixed-rate investments offer comparatively small yields these days.    

7. Retiring with heavier debts. It is hard to preserve (or accumulate) wealth when you are handing portions of it to creditors.   

8. Putting college costs before retirement costs. There is no “financial aid” program for retirement. There are no “retirement loans.” Your children have their whole financial lives ahead of them. Try to refrain from touching your home equity or your IRA to pay for their education expenses.   

maze, retirement plan

9. Retiring with no plan or investment strategy. An unplanned retirement may bring terrible financial surprises; the absence of a strategy can leave people prone to market timing and day trading.

These are some of the classic retirement planning mistakes. Why not plan to avoid them? Take a little time to review and refine your retirement strategy in the company of the financial professional you know and trust.

Do you have your retirement plan in place? Set up your FREE initial consultation with Brent E Chavez today:

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Learn more about Brent E Chavez, the Services We Provide, and Our Philosophy. Do you have any questions? Give us a shout: Contact Us, info@aeinvestmentsgroup.com, (215) 766-7002.

Citations
1 – forbes.com/sites/bobcarlson/2019/01/25/5-ways-to-maximize-social-security-benefits [1/25/19]
2 – fool.com/retirement/2019/12/11/4-steps-to-making-sure-youre-ready-to-retire.aspx [12/11/2019]
3 – ssa.gov/planners/lifeexpectancy.html [12/11/2019]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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2019 IRA Deadlines Are Approaching

Brent E Chavez

2019 IRA Deadlines Are Approaching

Here is what you need to know.

Financially, many of us associate April with taxes – but we should also associate April with important IRA deadlines.

April 1, 2020 is the deadline to take your Required Minimum Distribution (RMD) from certain individual retirement accounts.

A new federal law must be noted here. The Setting Every Community Up for Retirement Enhancement (SECURE) ACT, passed late in 2019, changed the age for the initial RMD for traditional IRAs and traditional workplace retirement plans. It lifted this age from 70½ to 72, effective as of 2020.1

So, if you were not 70½ or older when 2019 ended, you can wait to take your first RMD until age 72. If you were 70½ at the end of 2019, the old rules still apply, and your initial RMD deadline is April 1, 2020. Your second RMD will be due on December 31, 2020.1,2

Keep in mind that withdrawals from traditional, SIMPLE, and SEP-IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.

To qualify for the tax-free and penalty-free withdrawal of earnings from a Roth IRA, your Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

April 15, 2020 is the deadline for making annual contributions to a traditional IRA, Roth IRA, and certain other retirement accounts.3

The earlier you make your annual IRA contribution, the better. You can make a yearly IRA contribution any time between January 1 of the current year and April 15 of the next year. So, the contribution window for 2019 started on January 1, 2019 and ends on April 15, 2020. Accordingly, you can make your IRA contribution for 2020 any time from January 1, 2020 to April 15, 2021.4

You may help manage your income tax bill if you are eligible to contribute to a traditional IRA. To get the full tax deduction for your 2019 traditional IRA contribution, you have to meet one or more of these financial conditions:

• You aren’t eligible to participate in a workplace retirement plan.

• You are eligible to participate in a workplace retirement plan, but you are a single filer or head of household with Modified Adjusted Gross Income (MAGI) of $64,000 or less. (Or if you file jointly with your spouse, your combined MAGI is $103,000 or less.)5

• You aren’t eligible to participate in a workplace retirement plan, but your spouse is eligible and your combined 2019 gross income is $193,000 or less.6

Thanks to the SECURE Act, both traditional and Roth IRA owners now have the chance to contribute to their IRAs as long as they have taxable compensation (and in the case of Roth IRAs, MAGI below a certain level; see below).1,4

If you are making a 2019 IRA contribution in early 2020, you must tell the investment company hosting the IRA account which year the contribution is for. If you fail to indicate the tax year that the contribution applies to, the custodian firm may make a default assumption that the contribution is for the current year (and note exactly that to the I.R.S.).

So, write “2020 IRA contribution” or “2019 IRA contribution,” as applicable, in the memo area of your check, plainly and simply. Be sure to write your account number on the check. If you make your contribution electronically, double-check that these details are communicated.

How much can you put into an IRA this year? You can contribute up to $6,000 to a Roth or traditional IRA for the 2020 tax year; $7,000, if you will be 50 or older this year. (The same applies for the 2019 tax year). Should you make an IRA contribution exceeding these limits, you have until the following April 15 to correct the contribution with the help of an I.R.S. form. If you don’t, the amount of the excess contribution will be taxed at 6% each year the correction is avoided.3,4

The maximum contribution to a Roth IRA may be reduced because of Modified Adjusted Gross Income (MAGI) phaseouts, which kick in as follows.

2019 Tax Year7
• Single/head of household: $122,000 – $137,000
• Married filing jointly: $193,000 – $203,000          

2020 Tax Year8
• Single/head of household: $124,000 – $139,000
• Married filing jointly: $196,000 – $206,000

The I.R.S. has other rules for other income brackets. If your MAGI falls within the applicable phase-out range, you may be eligible to make a partial contribution.7,8 A last reminder for those who turned 70½ in 2019: you need to take your first traditional IRA RMD by April 1, 2020 at the latest. The investment company that serves as custodian (host) of your IRA should have alerted you to this deadline; in fact, they have probably calculated the RMD amount for you. Your subsequent RMD deadlines will all fall on December 31.2

Do you have any questions? Please contact us! info@aeinvestmentsgroup.com, 215-766-7002.

Citations
1 – marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21 [1/8/20]
2 – kiplinger.com/article/retirement/T045-C000-S001-the-deadline-for-your-first-rmd-is-april-1.html [3/29/19]
3 – irs.gov/retirement-plans/ira-year-end-reminders [11/8/19]
4 – irs.gov/retirement-plans/traditional-and-roth-iras [1/8/20]
5 – irs.gov/retirement-plans/2019-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work [11/18/19]
6 – irs.gov/retirement-plans/2019-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-not-covered-by-a-retirement-plan-at-work [11/18/19]
7 – irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019 [11/18/19]
8 – irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2020 [11/8/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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