Roth IRA Conversions Under New Tax Law

Roth IRAs have two big tax advantages

The two most-important Roth IRA tax advantages are:

Tax-Free withdrawals

Unlike traditional IRA withdrawals, qualified Roth IRA withdrawals are federal-income-tax-free and usually state-income-tax-free too. What is a qualified withdrawal? It’s one that is taken after you, as the Roth account owner, have met both of the following requirements:

1. You’ve had at least one Roth IRA open for over five years.

2. You’ve reached age 59½ or become disabled or dead.

For purposes of meeting the five-year requirement, the clock starts ticking on the first day of the tax year for which you make your initial contribution to your first Roth account. That initial contribution can be a regular annual contribution, or it can be a conversion contribution. For example, say your initial Roth pay-in was an annual contribution made on 4/1/14 for your 2013 tax year. The five-year clock started ticking on 1/1/13 (the beginning of the tax year for which the contribution was made), and you met the five-year requirement on 1/1/18.

Exempt from required minimum distribution rules

Unlike with a traditional IRA, you don’t have to start taking annual required minimum distributions (RMDs) from Roth accounts after reaching age 70½. Instead, you can leave your Roth account(s) untouched for as long as you live if you wish. This important privilege makes your Roth IRA a great asset to leave to your heirs (to the extent you don’t need the Roth money to help finance your own retirement).

Making annual Roth IRA contributions

Annual Roth contributions make the most sense for those who believe they will pay the same or higher tax rates during retirement. Higher future taxes can be avoided on Roth account earnings, because qualified Roth withdrawals are federal-income-tax-free (and usually state-income-tax-free too).

The downside is you get no deductions for making Roth contributions.

So if you expect to pay lower tax rates during retirement (good luck with that), you might be better off making deductible traditional IRA contributions (assuming your income permits), because the current deductions may be worth more to you than tax-free withdrawals later on.

The other best-case scenario for annual Roth contributions is when you have maxed out on deductible retirement plan contributions. For example, you’ve contributed the maximum possible amount to your 401(k) plan at work. In that case, making Roth contributions is basically a no-brainer.

Annual contributions are limited and earned income is required

The absolute maximum amount you can contribute to a Roth account for any tax year is the lesser of: (1) your earned income for the year or (2) the annual contribution limit for the year. Basically, earned income means wage and salary income (including bonuses), self-employment income, and alimony received that is included in your gross income (believe it or not). If you are married, you can add your spouse’s earned income to the total.

For 2018, the annual Roth contribution limit is $5,500 or $6,500 if you will be age 50 or older as of year-end.

Annual contribution privilege is phased out at higher incomes

For 2018, eligibility to make annual Roth contributions is phased out between modified adjusted gross income (MAGI) of $120,000 and $135,000 for unmarried individuals.

For married joint filers, the 2018 phase-out range is between MAGI of $189,000 and $199,000.

Annual contribution deadline

The deadline for making annual Roth contributions is the same as the deadline for annual traditional IRA contributions, i.e., the original due date of your return. For example, the contribution deadline for the 2018 tax year is 4/15/19. However, you can make a 2018 contribution anytime between now and then. The sooner you contribute, the sooner you can start earning tax-free income.

Well-seasoned individuals can still make annual Roth contributions

After reaching age 70½, you can still make annual Roth IRA contributions — assuming there are no problems with the earned income limitation or the income-based phase-out rule. In contrast, you cannot make any more contributions to traditional IRAs after you reach age 70½.

Roth conversions

The quickest way to get a significant sum into a Roth IRA is by converting a traditional IRA to Roth status. The conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a payout from the traditional account with the money then going into the new Roth account. So doing a conversion before year-end will trigger a bigger federal income tax bill for this year (and maybe a bigger state income tax bill too).

However, today’s federal income tax rates might be the lowest you’ll see for the rest of your life. Thanks to the TCJA, the rates shown below apply for 2018. These brackets will be adjusted for inflation for 2019-2025. In 2026, the pre-TCJA rates and brackets are scheduled to come back into force.

Single Joint HOH*

10% tax bracket $ 0-9,525 0-19,050 0-13,600

Beginning of 12% bracket 9,526 19,051 13,601

Beginning of 22 bracket 38,701 77,401 51,801

Beginning of 24% bracket 82,501 165,001 82,501

Beginning of 32% bracket 157,501 315,001 157,501

Beginning of 35% bracket 200,001 400,001 200,001

Beginning of 37% bracket 500,001 600,001 500,001

* Head of household

So if you convert in 2018, you’ll pay today’s low tax rates on the extra income triggered by the conversion and completely avoid the potential for higher future rates on all the post-conversion income that will be earned in your Roth account. That’s because Roth withdrawals taken after age 59½ are totally federal-income-tax-free, as long as you’ve had at least one Roth account open for over five years.

To be clear, the best candidates for the Roth conversion strategy are people who believe that their tax rates during retirement will be the same or higher than their current tax rates. If you fit into that category, please keep reading.

Consider multi-year conversion strategy

Converting a traditional IRA with a relatively big balance could push you into a higher tax bracket. For example, if you’re single and expect your 2018 taxable income to be about $110,000, your marginal federal income tax rate is 24%. Converting a $100,000 traditional IRA into a Roth account in 2018 would cause about half of the extra income from the conversion to be taxed at 32%. But if you spread the $100,000 conversion 50/50 over 2018 and 2019 (which you are allowed to do), almost all of the extra income from converting would be taxed at 24%.

Ill-advised conversions in 2018 and beyond cannot be reversed

For 2018 and beyond, you cannot reverse the conversion of a traditional IRA into a Roth account. Under prior law, you had until October 15 of the year after an ill-advised conversion to reverse it and thereby avoid the conversion tax hit.

2017 Conversions can still be reversed as late as Oct. 15, 2018

The IRS has clarified that if you converted a traditional IRA into a Roth account in 2017, you can reverse the conversion as long as you get it done by 10/15/18. That 10/15/18 deadline applies whether or not you extend your 2017 Form 1040.

You accomplish a Roth conversion reversal by “re-characterizing” (weird word chosen by the IRS) the Roth account back to traditional IRA status. That is done by turning in the proper form to your Roth IRA trustee or custodian.

Conclusion on conversions

Low current tax cost for converting + avoidance of possibly higher tax rates in future years on income that will accumulate in your Roth account = continuing perfect storm for the Roth conversion strategy. However, talk to your tax adviser before pulling the trigger on a conversion — just to make sure you’ve considered all the relevant factors.

The Bottom Line

Even with the new law’s dis-allowance of the Roth conversion reversal privilege, Roth IRAs are still a tax-smart retirement savings alternative for many folks. Maybe now more than ever.


What to do if you inherit a spouse’s IRA

So you’ve inherited your spouse’s IRA. What you do now could have far-reaching tax implications. The one thing you cannot do is sit on your hands. Why? Because if you fail to withdraw at least the required minimum amount from your inherited IRA, you will be charged a penalty equal to 50% of the shortfall. This is one of the toughest penalties in our beloved Internal Revenue Code. So please pay attention and read on to learn how to calculate required minimum withdrawals from an IRA you inherited from your spouse.

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IRS Grants Sweeping Relief To Retirement Savers Who Miss Rollover Deadline

By , Contributor

In a surprise move, the Internal Revenue Service today made it dramatically easier and cheaper for taxpayers who miss the 60 day deadline for rolling over retirement account money to fix their errors. “It’s a great move by IRS. It’s a taxpayer friendly move,” exalted  IRA expert Ed Slott, after learning of the change from Forbes. “There will be people, that this ruling today, will save their retirement savings.’’

By law, money received by a taxpayer from an IRA, 401(k), or other workplace retirement plan, must be contributed (i.e. rolled over) to another retirement account within 60 days to escape immediate taxation. Otherwise, it is considered a distribution subject to regular taxes and (if you’re under 59 ½), apossible 10% early withdrawal penalty. That 60 day rule tripped up so many taxpayers, that in 2001 Congress gave the IRS the ability to waive it, if the delay wasn’t a taxpayer’s fault —for example,  his house was destroyed, or a financial advisor gave him bum advice about the time he had to do the rollover.

Until today, however, to get 60 day relief, you had to apply to the IRS for what’s known as a private letter ruling. That meant paying the IRS a stiff fee (which rose on January 1, 2016 to a stunning $10,000), plus shelling out another $5,000 to $10,000 for a tax pro to prepare the private letter ruling request. The ruling took six to nine months, and you couldn’t roll the money into a new account until the IRS  gave the green light. Even worse, Slott says, a lot of people didn’t even know the letter ruling was an option, and ended up paying a whopping tax bill on their retirement savings and losing potentially decades of tax deferral, because of an innocent mistake.

But in Revenue Procedure 2016-47, both  issued and effective today, the IRS has created a new “self-certification” procedure that allows someone who misses the 60 day deadline to avoid the expense and delay of obtaining a private letter ruling. Instead, a taxpayer submits a model IRS letter to the  new retirement account custodian, checking in that letter one of 11 acceptable excuses for missing the deadline. This isn’t an unconditional pass—the IRA custodian will report the letter to the IRS and should the taxpayer be audited, the IRS can still determine he didn’t quality for 60 day relief.

But the 11 excuses are pretty inclusive and cover most of the reasons that the IRS has granted private letter relief for in the past.   They include an error by a financial institution; a taxpayer misplacing (and never cashing) the retirement account distribution check; and a taxpayer mistakenly putting the check in a taxable account he thought was an eligible retirement account.  There’s also lots of dispensation for personal problems, including a death or serious illness in the family;  a home being severely damaged; and even a taxpayer being unable to  complete the rollover because he was incarcerated.

One catch is that the taxpayer must usually complete the late rollover within 30 days after the circumstance which kept him from making a more timely rollover is discovered or ends. “One of these reasons is because a family member dies. Who’s to say when the 30 days starts? When do you finish grieving?’’ Slott asked. “It’s a little ambiguous. I would get it done as soon as possible,” he added.

While the reasons are broad, they only apply if you were eligible to do a 60 day rollover to begin with.  That’s a crucial point, because, as a result of a 2014 U.S. Tax Court decision,  taxpayers may only do one 60 day IRA rollover every 12 months, no matter how many IRAs they have.  (Before that, you could do one rollover a year for each IRA.)

The safest way to move money from one retirement account to another is to have one trustee (that would be the bank, broker, mutual fund or other financial firm that holds your account)  transfer it directly to another trustee.  You can do that as many times a year as you want and run no risk of missing the 60 day deadline. In announcing the new self-certification procedure, the IRS urged taxpayers to consider such direct trustee-to-trustee transfers.

Note that IRAs inherited from anyone other than a spouse never qualify for 60 day rollovers; they can be moved only from trustee to trustee and must be carefully retitled as an “inherited IRA” —e.g.  “John X. Smith II,  deceased, inherited IRA for the benefit of John X Smith III.”

In addition, 401(k) money is almost always best transferred directly from custodian to custodian. That’s because if you take a distribution from your 401(k), your employer must withhold 20% for taxes, meaning you won’t have the full amount to put into the new account unless you can come up with it from your other savings.

Warning: one excuse the IRS won’t allow is that you were using your retirement money as a short term loan for some non-retirement purpose—say, a down payment on a house—and missed the 60 day deadline because of a snag. In its private letter rulings, the IRS has shown little mercy to taxpayers in such situations.

Source: Forbes


Tax-Smart Ways to Save When You’re Too Old for a Traditional IRA

Some workers may be too old to contribute to a traditional IRA.

By Kimberly Lankford, August 19, 2016

I’m 72 years old and earn some money as a self-employed consultant. Can I contribute to an IRA and, if so, how much?

You can’t contribute to a traditional IRA starting in the year you turn 70½. But you can contribute to a Roth IRA at any age, and the money can grow tax-free in the account indefinitely (you don’t have to take required minimum distributions). To qualify for a Roth, your income in 2016 must be less than $132,000 if you’re single or $194,000 if you’re married and file taxes jointly.

You can contribute up to the amount you earned for the year (your net income from self-employment), with a maximum of $6,500 ($5,500 plus $1,000 for people age 50 and older). If your earnings are well over the $6,500 max, you can simply contribute that amount, but if they are close to or under the maximum, you’ll need to know what is considered compensation and how to calculate your allowed contribution. For that information, see IRS Publication 590, Individual Retirement Arrangements.

Or, because you are self-employed, you can contribute to a solo 401(k), says Rande Spiegelman, vice president of financial planning with the Schwab Center for Financial Research. You can deduct your contribution now and defer taxes on the money until it’s withdrawn. But because you’re over age 70½, you must take required minimum distributions from the solo 401(k). Employees usually don’t have to take RMDs from their current employer’s 401(k) if they’re still working at age 70½, but that rule doesn’t apply if you own 5% or more of the company. Because you’re self-employed and own the whole company, you’re stuck taking the RMDs.



Can an IRA Go Into an Irrevocable Trust?

By , Contributor

Setting up a trust as an IRA beneficiary has advantages and potential pitfalls.

The primary purpose of IRAs is to provide for the retirement needs of the original owner. However, IRAs have also become a useful tool in estate planning, and many IRA owners look for ways to protect their assets for future generations.

Naming an irrevocable trust as a beneficiary of an IRA can provide that protection, but if you don’t structure the trust correctly, it can come at a high cost.


IRAs Have a Regulatory Headache Coming

The Wall Street Journal

A rush of savings from company 401(k) plans to IRAs may slow just as baby boomers are retiring, as a result of the Labor Department’s anticipated move to toughen standards for advice on retirement accounts.

The proposed regulation, which may be finalized by early April, extends a revamped version of the “fiduciary” standard that governs corporate retirement plans to individual retirement accounts.

Under the rule as last proposed, advisers will generally have to avoid conflicts of interest and put their clients’ best interests first—both when recommending investments for IRAs and when suggesting moving money from a company plan to an IRA in the first place, which is known as a rollover.

The new rule will make it harder for advisers to recommend such a move, as they will have to clearly document why it is in a client’s best interest. Additionally, once the money is in an IRA, advisers would generally have to avoid payments, including commissions, that create incentives for them to select one product over another.

Advisers to individuals typically have an incentive to recommend rollovers, since they stand to earn fees or commissions on the dollars shifted to IRAs.

At stake is a large pot of money that is expected to grow as the baby boomers continue to leave the workforce. IRAs hold an estimated $7.3 trillion of the nation’s $24 trillion in retirement assets, more than the $6.7 trillion in 401(k)-type plans.

Fueled by the rise of the 401(k) and an increasingly mobile workforce, rollovers are expected to amount to $439 billion this year, up from $271 billion in 2010, according to Cerulli Associates, a research firm that specializes in the asset-management industry.

Because rollovers now account for more than 90% of the money flowing into IRAs each year and carry relatively high median balances—$100,000 for traditional IRAs with rollover money, versus $40,000 for those funded solely by annual contributions, according to the Investment Company Institute trade group—they are “all the more important to financial-services companies and advisers seeking to grow their businesses,” says Michael Wong, an analyst who covers brokerage firms at Morningstar Inc.

The expected Labor Department rule for retirement savings would be a change from current regulation, which allows brokers to provide “suitable” rather than fiduciary advice, a lower standard.

Critics argue current requirements permit advisers to encourage investors to abandon 401(k) plans for IRAs that often hold higher-fee investments, even though those added fees can reduce returns. “In many cases, that’s clearly not in the best interests of investors,” says Christopher Jones, chief investment officer at Financial Engines Inc., a Sunnyvale, Calif., company that mainly manages 401(k) accounts for participants who want investment help. The firm also offers an IRA service.

The White House Council of Economic Advisers estimates that individual investors sacrifice about 1 percentage point of annual returns due to advice from conflicted advisers that leads them into higher-cost investments—or about $17 billion a year.

Participants in 401(k) plans who invest in stock mutual funds pay annual expense ratios of 0.54%, on average, versus 0.71% for IRA owners, according to the mutual-fund industry’s Investment Company Institute.

Experts say more advisers may think twice under the coming rule before recommending transfers that result in higher fees. As a result, more money may stay in employer-sponsored plans, especially large plans that leverage their size to negotiate low institutional rates.

“We’ll definitely see fewer rollovers,” says Jason Roberts, a pension-law attorney and chief executive of Pension Resource Institute, a compliance consulting firm. Because advisers will have to research clients’ needs better and document why recommendations are in their interests, “you may see recommendations that are being made today not being made in the future,” he says.

That would be welcome news to Robin Diamonte, chief investment officer at United Technologies Corp., who oversees $44 billion in retirement money for the conglomerate’s employees.

“We have various record keepers and advisers aggressively calling our retirees and trying to persuade them to roll over to their platforms, in many cases with conflicted and misleading marketing material,” says Ms. Diamonte. “This rule is going to have a chilling effect on these high-fee, aggressive rollover chasers.”

A slowdown in rollovers could benefit participants in the United Technologies 401(k) plan, which is among a growing number urging former employees to remain in the 401(k) after changing jobs or retiring. One goal is to stem the withdrawals that undermine a plan’s leverage to negotiate lower fees.

By contrast, at smaller companies, workplace retirement plans often have high expenses, which can make IRA rollovers a cost-saving maneuver for participants. Beyond cost considerations, retirement savers can find rollovers attractive to consolidate assets in a single account or to get more personalized advice or additional investment options.

Under the fiduciary-duty rule as last proposed, advisers typically wouldn’t be able to suggest a rollover without first asking the investor to sign a contract that includes detailed information about the investment fees and the adviser’s compensation and obligations to act in the investor’s best interests, says Fred Reish, a lawyer who specializes in employee benefits and compensation. That is a requirement that many in the financial-services industry have called unworkable and burdensome.

An upfront request to sign such a contract won’t likely discourage investors from rolling 401(k) money to IRAs with advisers they already work with, said Bing Waldert, managing director at Cerulli, but it could affect transactions that involve new advisers.

It is likely that some firms and individual advisers will respond to the Labor Department rule by emphasizing low-cost investment options for IRAs. Rob Foregger, co-founder of digital-advice software company NextCapital, says “there will be increased scrutiny on the cost differential between rollover IRAs and 401(k)s, which will put increasing downward pricing pressure on IRA fees.”

Some advisers may stop soliciting rollovers from certain 401(k) participants altogether. Many brokerages opposed to the Labor Department rule say it will no longer be profitable for them to accept rollovers of relatively small accounts, such as those of $50,000 or less. That said, some brokerages have recently announced plans to offer fee-based accounts for minimums as low as $5,000 or $10,000.


MLP Investors Hit with Surprise Tax Bill on IRA Income

By Mark P. Cussen, CFP®, CMFC, AFC | January 05, 2016

Traditional and Roth IRAs are considered to be either tax-deferred or tax-free havens where an investor’s money can grow without needing to be reported on the 1040 each year. Dividends, interest and capital gains can accumulate in these accounts without one penny being taxed until withdrawal, if it is taxed at all. However, some taxpayers who had invested in a master limited partnership (MLP) received a very unpleasant surprise in the mail when they were notified that they owed a substantial amount in taxes on this investment, even though it was purchased inside their retirement plans and accounts. Unfortunately, the tax advantages provided by IRAs have a few additional little-known limits on top of the standard contribution and distribution rules.
Unrelated Business Income

While virtually all forms of investment income are exempt from current taxation in an IRA or qualified plan, “virtually” does not exclude a type of income the IRS calls unrelated business income (UBI). This type of income is generated when a tax-exempt organization generates income that is incidental to its real purpose. For example, if an educational institution runs a cafeteria for students that makes a profit, the institution will probably be required to report that income on its tax return even though it is a qualified 501(c)3 organization. (For more, see: Pros and Cons of Master Limited Partnerships.)

The investors who were notified of their unexpected tax liability were investors in a MLP offered by Kinder Morgan Inc. (KMI), a southern pipeline company in the oil industry. MLPs are popular with sophisticated investors because they allow for direct ownership of businesses without the double taxation that comes with corporations. These pass-through entities confer taxation for partnership income onto their unit holders, but the total amount of tax paid is less overall than it would be if the investors held shares of stock.

However, Kinder Morgan made the move to convert to a C corporation in 2014, which meant that all units of their existing MLP would have to be liquidated. This meant that all of the deferred gains and other passive investment income that was generated by these units would now become declarable as taxable income, even though these investors held the units inside their retirement accounts. In this case, the income generated by the sale was classified as unrelated business income by the Internal Revenue Service (IRS). A portion of the exchange of MLP units for shares will be reported as a capital gain or loss with the remainder being classified as ordinary income. In most cases, the IRA custodian will file a Form 990-T on behalf of its customers when this form of income is generated. (For more, see: MLPs: Time to Invest or Has Their Time Passed?)

However, to add insult to injury, the custodians for many of the IRA investors were also taken by surprise as a result of this bill, and firms such as Pershing were not able to file this form in a timely manner because the K-1 partnership income forms generated by Kinder Morgan did not have enough information on them to make the necessary calculations. The IRS then levied interest and penalties on all balances owed by IRA unit holders that substantially increased the amount that they owed. The custodians are now negotiating with the IRS to eliminate this additional amount, but the initial amount will still be due.
The Bottom Line

Although most types of income can be deferred inside a traditional or Roth IRA, their tax firewall does have some chinks. Many tax and investment experts caution IRA investors against buying MLPs that are traded publicly inside these accounts because of issues like the one described above. If you own shares or units of this type of investment in an IRA, consult your tax or financial advisor to find out whether you may face this type of liability at some point. (For more, see: Should I Buy an MLP for My Retirement Account?)

Read more: MLP Investors Hit with Surprise Tax Bill on IRA Income | Investopedia


Don’t Be a Victim of These Costly IRA Myths

Time Money article by Don Cloud    

Recently, a client came to me after her husband had died. She was 48 years old and was seeking guidance on how to handle her newly inherited assets.

Her husband left her an IRA of about $100,000. Knowing that she would need the money immediately, the woman initially planned to take a lump sum distribution of the IRA, thinking this was the best way to quickly access the funds in the account.

This is when I realized that the woman had a serious misunderstanding of her IRA options.

I often seem to encounter clients who are unsure about their IRA options. These retirement vehicles come with many complex laws and guidelines that account holders must follow in order to make the most out of their savings. From ever-changing tax laws to an endless list of distribution rules, IRAs can leave the savviest of investors frustrated and angry. Despite the amount of resources that are out there, I have found that investors are as confused as ever about their IRA options.

MYTH: If I am recently widowed and inherited an IRA, a lump sum distribution is the best way to get the money I need.

When the woman initially requested that she take a lump sum distribution on her husband’s account, I brought to her attention the consequences of such a decision. She would not only pay taxes on the total amount, but she would also face an early withdrawal penalty because she was not yet 59½ years old. Since she would need the money to help pay for her and her family’s expenses, I suggested she keep the asset as an inherited IRA. The client was hesitant at first. She wanted to consolidate her accounts. An inherited IRA, she believed, was the same thing as an IRA. She told me she felt there was no benefit to leaving the account alone.

I responded that in fact there was a benefit. Maintaining an inherited IRA would allow her to take distributions from the account and avoid the large tax hit of taking a lump sum and penalties associated with early withdrawals. She could pay her bills while avoiding the wrath of Uncle Sam.

I also let her know that once she turned 59½, she could then take advantage of a spousal rollover. By moving the funds into her own name, the required minimum distribution would no longer be calculated based on the birthdate of her husband, who was older than her, but instead on her own. That would let her enjoy the benefits of tax-deferred growth in the IRA for longer than if she had left it as an inherited IRA. At this point, the woman was much more open to my suggestions.

MYTH: My will ensures that my IRA is distributed correctly.

About five years ago, I sat down with a married couple who had recently signed on as clients. As I looked into their assets and accounts, I recognized a major red flag. It wasn’t in their distribution plans, but rather their beneficiary forms.

Through the years, I have found that many investors believe their will is going to take care of everything. They think that if they state their intentions in their will, they will only complicate the situation by designating a person as an IRA beneficiary. The husband had named their estate as the primary beneficiary to his IRA.

He hadn’t understood the implications of his decision. Leaving an IRA to an estate instead of a person can create a significantly more complicated and expensive tax bill, as well as the costs and delays of going through probate. By naming his wife as the primary beneficiary, not only could they avoid that tax bill and probate process, but the wife could eventually take advantage of a spousal rollover as well. Because the couple also had children, I let the husband know he could take his planning one step further and name his children as contingent beneficiaries to the account. I explained that this would help reduce some of the wife’s planning later in life, while also setting the children up to take advantage of a stretch IRA.

This April, the husband died, and I learned the results of my advice. The wife informed me that their family saved roughly $80,000 in income tax. They also sidestepped additional costs by avoiding probate. The woman thanked me for my brutal honesty.

In our technologically advanced world, there is an endless supply of financial advice at our fingertips, and it can be hard to distinguish what information is accurate and what strategies are truly in your best interest. Ultimately, it’s my job as a financial advisor to help clear these misconceptions and set my clients on the right path toward retirement success.

– Don Cloud is president and founder of Cloud Financial, an independent financial advisory firm with offices in Huntsville, Florence, and Gadsden, Alabama.



5 Surprising Facts about IRAs

Individual retirement accounts allow you to claim a tax break while saving for retirement, which makes them an ideal place to stash your nest egg. Americans have funneled trillions of dollars into these tax-deferred accounts since they were created in 1974, both through direct contributions and rollovers from workplace accounts. Here’s a look at how much workers are depositing in IRAs.

The average balance tops $100,000. Individuals held an average of $119,804 in their IRAs in 2013, according to an Employee Benefit Research Institute analysis of 25.8 million IRAs holding $2.46 trillion in assets. And the top 12 percent of savers have over $250,000 stashed in IRAs, up from 9 percent in 2010. “The increases found in the average balances in 2013 are likely to continue, as is the importance of IRA assets for individuals during retirement,” says Craig Copeland, a senior research associate at EBRI and author of the report. However, the median (mid-point) IRA balance was just $32,179 in 2013. And 45 percent of those with IRAs have less than $25,000 in their accounts. Unsurprisingly, IRA balances increased with age, from a median of $3,708 for those under 25 to $75,627 for people ages 70 or older.

Many people max out their IRA. The average IRA contribution increased from $3,335 in 2010 to $4,145 in 2013. And 43 percent of investors who saved in an IRA contributed the maximum possible amount in 2013. The proportion of IRA account owners contributing the maximum peaked at 53 percent in 2012 before falling in 2013, likely due to an increase in the IRA contribution limit. The IRA contribution limit is $5,500 in 2015, and increases to $6,500 for those ages 50 and older.

Most contributions originate with 401(k)s. Much of the money held in IRAs was first saved in workplace retirement plans, and then rolled over to an IRA. “With growing 401(k) plan balances and IRAs being a popular destination for 401(k) assets when people change jobs or retire, the amount of income derived from IRAs will grow significantly,” Copeland says. The average rollover to a traditional IRA was worth $96,660, and the median rollover amount was $27,967 in 2013. Three-quarters of rollovers to IRAs were worth more than $5,000, and 9 percent of workers shifted over $250,000 to an IRA. EBRI found that 14.5 times more dollars were deposited in IRAs via rollovers than contributed directly to IRAs.

Roth IRAs are more popular than traditional IRAs. More contributions were made to Roth IRAs than traditional IRAs in 2013. You can’t claim a tax deduction for Roth IRA contributions, but withdrawals in retirement from accounts at least five years old are tax free. Roth accounts are especially popular with young workers. Nearly a quarter (24 percent) of Roth IRA contributions are made by investors ages 25 to 34, compared to 7.5 percent of traditional account deposits by people the same age. The average Roth IRA contribution of $4,009 is smaller than the $4,338 average contribution to traditional IRAs. However, the $6 billion contributed to Roth IRAs is substantially more than the $4.61 billion deposited in traditional IRAs due to more people contributing to Roth accounts than traditional IRAs.

IRA balances have largely recovered from the recession. The average IRA balance declined from $91,864 in 2010 to $87,668 in 2011, but then climbed back up to $119,804 in 2013. That’s a 30 percent increase from 2010 to 2013, which reflects both investment gains and new contributions. The median account balance dipped from $25,296 in 2010 to $23,785 in 2011 before increasing to $32,179 by 2013.

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