Month: March 2020

A number of tax-deferred investment vehicles are available to individuals saving for retirement, and that is a wonderful thing. With tax deferral, the return on your investment is not reduced by income taxes every year: you pay taxes only when you withdraw the money, most likely in retirement, when you may be in a lower tax bracket and will thus pay fewer taxes on the distributions. So what are your options?

The first kind of retirement plan you may think of for its tax-deferral benefits is your employer-sponsored retirement plan. These plans include defined benefit plans (more commonly referred to as pension plans), which provide a specific benefit in retirement, and defined contribution plans (such as 401(k) and 403(b) plans), which provide a specific contribution to an account in your name, but the benefit you will receive upon your retirement depends on the investment experience of your account.

But you have other options, including individual retirement accounts (IRAs). Traditional IRAs (to which anyone can contribute) and SEP and SIMPLE IRAs (designed for self-employed individuals and smaller employers) are like employer-sponsored retirement plans, but you purchase them yourself. Roth IRAs are a little different: you make after-tax contributions and investment income accrues tax free, but distributions are generally not taxed.

Finally, you could consider a fixed annuity, which is a financial product that provides a stream of income based on guaranteed rate of return for a certain period of time or even for your entire life. Because of this, annuities are similar to defined benefit plans or traditional pensions.

Note that there are different eligibility rules for each of these investment vehicles, such as income phase-outs, age requirements, and contribution limits. Please reach out to us if you need help determining which of these options is most suitable for you given your financial circumstances.

With tax time approaching quickly, many American investors are asking questions about their individual retirement accounts (IRAs).

One big question: “If I didn’t turn 70 1/2 until early 2020, can I still make deposits into my traditional IRA?”

The answer is yes. Because you didn’t reach age 70 1/2 in 2019, you are eligible to make a contribution for the 2019 tax year (which is the year before the year in which you turn 70 1/2).

The maximum contribution is $6,000, and because you are older than 50, you qualify for a catch-up contribution of $1,000, meaning your total 2019 contribution can be up to $7,000.

There are some rules to follow, however. You may not contribute more than 100% of your earned income (or salary from work, but not dividend interest from your investments). So, if your earned income for 2019 will be less than $7,000, you may not contribute the full amount.

Another question: “When can I start taking distributions from my IRA?”

Anyone may begin taking distributions from an IRA without penalty at age 59 1/2. But you must begin taking required minimum distributions (RMDs) by April 1 of the year following the year in which you turn 70 1/2 (April 1, 2021, in the case of the questioner above). RMDs are determined by dividing the total balance of all your IRAs as of December 31 of the prior year by your life expectancy, as listed by IRS Publication 590.

Sound complicated? It can be. That is why it is helpful to have a financial advisor guiding you. Please reach out to us for assistance with your IRA contributions or withdrawals.