An Individual Retirement Arrangement (IRA) is a type of account that provides special tax treatment and is intended to help you save money for your retirement. There are several types of IRA’s, but the two most common are traditional IRA’s and Roth IRA’s. While traditional IRA’s and Roth IRA’s share many similarities, in some respects, they are opposites. For instance, you generally receive a tax break when you put money into a Traditional IRA, but when you take it out, you'll generally pay tax on whatever it has grown to. With Roth IRA’s on the other hand, there are generally no tax breaks when you put money in, but provided you meet certain guidelines, whatever it grows to can be withdrawn tax and penalty free.

Anyone who has “earned compensation” can make a Traditional IRA contribution for that year. For most people, compensation is earned income in the form of W2 wages or self-employment income.

For 2024, you can contribute $7000 to a Traditional IRA or up to your total compensation, whichever is less, if you are 50 or older by the end of 2024, there's a special $1000 catchup contribution, which increases the total amount you can contribute to your Traditional IRA for 2024 to $8000.

In general, Traditional IRA contributions for a particular year can be made-up to April 15th of the following year. For instance, a 2023 Traditional IRA contribution can be made-up until April 15th, 2024.

Typically, you are able to receive a tax deduction from money contributed to your Traditional IRA account, even if you don't itemize deductions on your return. If, however, either you or your spouse are an active participant in an employer sponsored retirement plan and your income exceeds certain thresholds, your ability to claim a deduction for your Traditional IRA contribution will be reduced or eliminated.

In most cases, your entire IRA withdrawal is added together with your other income and is taxable at your marginal income tax rate. Plus, anytime you add income to your tax return including withdrawals from IRA’s and other retirement accounts, you are in danger of reducing certain benefits, such as deductions and credits, and increasing costs, such as surtaxes and even certain Medicare premiums, that are tied to your income. This makes managing your IRA withdrawals very important.

Roth IRA contributions consist of new money that was not previously in another retirement account. The Roth IRA contribution limit is the same as the Traditional IRA contribution limit, $7000 for 2024 or $8000 if you are 50 or older by the end of the year. It's important to note that the Traditional IRA and Roth IRA contribution limits are coordinated, meaning the total amount you can contribute to both types of IRA’s, combined, for 2024 is $7000 or $8000 if 50 or older by the end of the year.

In order to make a Roth IRA contribution, you must have compensation and you must be below certain income limits.

In addition to Roth IRA contributions, there's another way to get money into a Roth IRA. It's called a Roth IRA conversion. In a Roth IRA conversion, retirement money is withdrawn from an existing retirement account, such as an IRA or 401k and is moved into the Roth IRA. The biggest benefit of a Roth IRA conversion is that after the conversion is made, the converted funds and all the future growth may be able to be distributed tax and penalty free.

Roth IRA conversions are not, however, without their share of drawbacks. For example, when you make a Roth IRA conversion, you must generally add the amount converted to your income for the year, increasing your tax bill. They are also irrevocable decisions, so make sure you do your homework before making a Roth IRA conversion important.

There are a number of different ways that you can try to get the biggest bang for your buck when you make a conversion and a good financial or tax advisor can help you determine which approach might be best for you.

Qualified distributions from Roth IRA’s are 100% income tax and penalty free. In order to be qualified, a distribution must take place more than 5 years after you established your first Roth IRA and it must also be made after one of the following:

• You are 59 1/2 or older

• You are disabled as defined by the tax code

• You pass away

• You are using the withdrawal to make a first time home purchase

Just because your Roth IRA distribution is not a qualified distribution doesn't mean it won't be income tax and penalty free. Depending on what type of Roth IRA money you withdraw, you may be able to access income tax and penalty free Roth IRA money well before you have a qualified distribution. For instance, any amounts contributed directly to your Roth IRA may be withdrawn tax and penalty free at any time. If you are 59 1/2 or over, you can also withdraw any converted amounts income tax and penalty free.

In most cases, interest, dividends, capital gains and other investment income are taxable in the year they are received. If that income is generated inside an IRA, however, the tax on those gains is deferred until funds are distributed from your account. By not paying tax on those amounts each year, you are able to keep more of your money invested than at the same investments were made with non-IRA money. As a result, tax deferral can help you grow your retirement savings larger and faster.

Many baby boomers have accumulated sizable retirement account balances in employer sponsored plans, like 401k's, 403b's and the Thrift Savings Plan offered to certain federal employees. The decision of what to do with these funds once they are available to you is a major decision and one that is rarely given the time and consideration it deserves.

In fact, many boomers are unaware of all the various options they may have at their disposal. Depending on a number of factors, you may have one or more of the following six options available to you in deciding what to do with assets in your current employer sponsored retirement plan. You can:

1. Leave your plan assets where they are

2. Roll over your assets to another employer sponsored retirement plan

3. Roll over your assets to an IRA

4. Take a lump sum distribution of your plan balance

5. Convert your plan assets to a Roth IRA

6. Make an in plan Roth conversion of your plan assets

Unfortunately, there's no one-size-fits-all solution. Each of the 6 options has its own set of advantages and disadvantages that must be carefully evaluated against your unique set of facts, circumstances, and objectives.

There are two different ways IRA and other retirement account money can be moved, directly and indirectly. In an “indirect rollover”, you take a withdrawal payable to you, personally.

When you move money “directly”, your retirement funds are sent from your old retirement account right to your new account and bypass you entirely. Alternatively, you can receive a check for your retirement funds made payable to your new financial institution. Moving retirement money directly is almost always the better option because it eliminates many of the tax traps that can dilute your retirement savings.

“Indirect rollovers”

• Roll over to another eligible retirement account must be completed within 60 days

• Pre tax portion of distribution generally subject to 20% mandatory withholding requirement

• Subject to 1 rollover per year limit

“Direct rollovers /trustee to trustee transfers”

• Not subject to the 60 day time limit

• Not subject to mandatory withholding

• Not subject to 1 rollover per year limit

You may not need to... you may not even want to... But at some point you must take money out of your Traditional IRA and, in most cases, your employer sponsored retirement plans, but not from your Roth IRA’s - your Roth IRA’s have no RMD's during your lifetime. This mandatory withdrawal amount is given a more formal name, a required minimum distribution or RMD. You can always take more than your RMD amount without an issue, but taking less could leave you with up to a 25% penalty.

After recent changes in the tax law, those born from 1951 to 1959 are set to begin RMD's once they reach age 73, while those born in future years will begin RMDs at age 75. Your RMD for a particular year must usually be taken by December 31st of that year. The lone exception is the first year you have in RMD. For that year only, you may wait up to April first of the following year to take your RMD without penalty. This date is known as your required beginning date.

RMD's are typically calculated by dividing your retirement account balance at the end of the previous year by an IRS provided life expectancy factor based on your age. Let's face it though, there's more than a good chance you don't think in terms of life expectancy factors.

When converted to a percentage, RMD's begin at less than 4% of your prior year end balance. Therefore, as long as your earnings are more than 4% in your IRA during those initial years, and you are withdrawing only your RMD, your account value will continue to increase.

Each year the percentage you must withdraw from your IRA steadily increases, but that doesn't mean that your actual RMD will always be higher from one year to the next. That will vary based on the investment performance of your account.

Your IRA beneficiary form typically determines who will inherit your account, not your will. If your will names one beneficiary, such as your child, and your IRA beneficiary form named someone else, such as your ex-spouse, the IRA beneficiary form will generally override your will, and your ex-spouse will receive the funds, disinheriting your child. Your beneficiary forms should be regularly reviewed with your financial advisor and updated to account for any changes in your life, the lives of your beneficiaries, or simply to reflect a change in your wishes.

You can name any person or any entity you'd like to be your IRA beneficiary, but the type of beneficiary that you name will determine the tax rules to which they are subject once they inherit.

The secure act of 2019 upended the long standing rules for IRA beneficiaries and effectively split IRA beneficiaries into three different groups: Eligible Designated Beneficiaries, Non Eligible Designated Beneficiaries, and Non Designated Beneficiaries.

Eligible Designated Beneficiaries

Of the 3 types of IRA beneficiaries, Eligible Designated Beneficiaries generally received the most favorable tax treatment. In short, they are able to stretch distributions over their life expectancy. While this benefit was widely available to most individuals before the secure act of 2019, it is now limited to the group of individuals who meet the definition of an Eligible Designated Beneficiaries.

In order to be an Eligible Designated Beneficiaries, a beneficiary must be one of the following:

• Your spouse

• Disabled

• Chronically ill

• Not more than 10 years younger than you

• Your minor children

So what exactly is the stretch IRA, and why is it so beneficial? The stretch is just a term used by practitioners to describe the ability of an Eligible Designated Beneficiaries to take only minimum distributions over their IRS provided life expectancy. Doing so can help an Eligible Designated Beneficiaries to minimize the amount of income they have to add to their tax return and allow the maximum amount possible to remain inside and inherited IRA account to continue to grow tax deferred.

Non Eligible Designated Beneficiaries

Non Eligible Designated Beneficiaries - Any living person such as adult children, or grandchildren or see through trust which does not qualify as an Eligible Designated Beneficiary - Must distribute inherited IRA assets using the secure acts new 10 year rule. Under this 10 year rule, the entire inherited retirement account must be emptied by the end of the 10th calendar year following the calendar year of inheritance.

Non Designated Beneficiaries

Non Designated Beneficiaries Generally receive the least favorable tax treatment. Non Designated Beneficiaries Include charities, your estate, including if you name your will as your beneficiary, and trusts which do not follow the see through trust rules. When an IRA owner's death occurs before their required beginning date, these beneficiaries must distribute everything from an inherited IRA, or Roth IRA, account by the end of the 5th calendar year after the year of death. If death occurs on or after the required beginning date, Non Designated Beneficiaries must distribute funds in a manner calculated using the decedents age.

Naming a trust as an IRA beneficiary gives you the ability to exercise control over how your IRA is distributed after you die. However, naming a trust as your IRA beneficiary can add considerable cost and complexity to your estate plan. In the end, the benefits of the increased post death control must be carefully weighed against these drawbacks. If this is something you want to consider, it's recommended that you consult with a qualified attorney.

More often than not, married couples name one another as their primary beneficiary. When a spouse inherits an IRA, they may be entitled to special treatment not available to other beneficiaries, in addition to the special treatment they already receive as an eligible designated beneficiary. In general, a spouse beneficiary has the following options:

Spousal Rollover

In a spousal rollover, a deceased spouses IRA funds are moved into the retirement account of a surviving spouse. Once a spousal rollover is completed, the money is treated as though it was always in the surviving spouses IRA. This can impact both when RMD's begin, and whether the surviving spouse could be subject to any penalties on distributions taken prior to age 59 1/2.

Election to treat a deceased spouses account as your own

The tax code lets you pretend like a deceased spouses IRA is your own IRA account. The tax consequences of doing so are essentially the same as for a spousal rollover, so this is also not often a poor choice if you are under 59 1/2.

Remain as a Beneficiary

The third option a spouse beneficiary may have is to remain a beneficiary of their deceased spouses IRA. In order to do so, a spouse beneficiary must establish a properly titled inherited IR A and have the deceased spouses funds moved into that inherited IRA directly. The chief advantage of this option is that beneficiaries are never subject to the 10% early distribution penalty that typically applies to an IRA owner's pre 59 1/2 withdrawals. Therefore, this option is generally the preferred option for a surviving spouse who inherits prior to reaching 59 1/2.

This information is not intended to be a substitute for personalized tax, legal, or investment planning advice and the strategies discussed herein may not be suitable for all investors. For specific advice, it is recommended that you consult with an appropriate qualified professional. Any tax information contained herein references the federal tax rules. The specific treatment of IRA's, Roth IRA's and/ or other retirement accounts for state tax purposes may be different.

The use of IRA’s, Roth IRA’s and/ or other retirement accounts does not guarantee any specific outcome, investment or otherwise. Rolling over your plan assets may not be right for you, as there may be disadvantages, including surrender charges, deferred sales charges, early withdrawal penalties, and the loss of certain rights and guarantees.