If you don’t already have an IRA, whether a traditional IRA or a Roth IRA, you are missing out on some real tax savings. A recent article in madison.com, “5 Things You Should Know about IRAs,” gives a great overview of this popular retirement savings vehicle. IRAs are a great way for individuals to save money for retirement at the same time that it provides tax advantages.
There are two main types of IRAs: traditional and Roth. Contributions made to a traditional IRA may be deductible or non-deductible, while all contributions made to a Roth are non-deductible. Both types of IRA accounts allow money to grow tax-deferred for many years. After age 59½, you can start taking qualified distributions. You’ll typically have to pay income tax on withdrawals from a traditional IRA, but withdrawals from a Roth are tax-free. Here’s what you need to know about IRAs:
- Saving for retirement is a solo job, at least when you’re putting money in a tax-sheltered retirement account. An IRA can only have one owner.
- IRAs have their own beneficiary designations, so who will inherit an IRA is based on the account's beneficiary designation forms, not what’s in a will, trust or any other estate document. However, you can name a trust as a beneficiary on a beneficiary designation form. Therefore, when you open an IRA, work with your estate planning attorney so you name the correct beneficiary. Remember to review and update the beneficiary designation form regularly, particularly when you have an important life event, such as marriage, divorce or a new child or grandchild. Work with an estate planning attorney on an ongoing basis so you review your beneficiary designations together regularly and so you don’t miss planning opportunities.
For those who may not need to rely on IRA assets in retirement and who are looking to pass wealth to their kids or grandkids, inherited IRA planning may be an option. You’ll need to work with an experienced estate planning attorney to do that correctly, however, since there are a number of complicated IRS rules to follow.
- You have until Tax Day to make your IRA contribution for the prior year. If you can't make a lump-sum contribution at the start of every year (giving your money added months to compound), you can spread your contributions over a 15-month period, from January until the following March to help you reach the annual contribution limit each year.
- You typically must have your own taxable compensation to fund an IRA. However, a working spouse can fund a non-working spouse's IRA, so you don't always have to use your own money to make your IRA contribution. Be sure to work with your financial professional to ensure you understand and are following the rules, however.
Retirement arrives before you know it. Be prepared so that you’ll have more flexibility and resources when the time comes! To be prepared, you’ll need to work with your financial professional to create a plan for saving and investing, and with your estate planning attorney to ensure you protect your assets.
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Reference: madison.com (March 13, 2017) “5 Things You Should Know About IRAs”