As Professor Concannon told me (in front of the entire law school class after I tried to "wing" an answer to one of his questions in 1L Civil Procedure), "Mr. Krull, do not think great thoughts ... just read the rules!"
I turned beet red.
But I never made that mistake again.
So, just read and follow the rules.
But what are they when it comes to IRA contributions?
For starters, each type of IRA must be in a separate account.
Whether you need to open a new IRA depends on your desired IRA contribution type and what kind of IRA you already own.
Also, it is important to note that contributions into a SEP-IRA or Simple IRA have a different set of rules.
In addition, if you are at least age 50 and have more earned income, you can also contribute an extra $1,000, which is called the “catch-up” contribution.
You can make an IRA contribution at any time during the year, but you have up until April 15 of the following year to make your contribution.
Note: There are no extensions, even if the IRS grants you an extension to file your income taxes.
With a traditional IRA, the contributions are deductible, but only if you or your spouse are not a participant in a qualified company retirement plan.
Think 401(k) or profit-sharing.
If you are a participant, your ability to deduct a traditional IRA contribution is phased out at $61,000 adjusted gross income (AGI) for singles and $98,000 for a married couple.
Your spouse’s ability to deduct a contribution starts to phase out at $183,000, if only you are a participant in the qualified plan.
You cannot contribute to a traditional IRA if you are over 70½, despite having had earned income.
IRA distributions are usually taxable as ordinary income.
They are also subject to a 10% early withdrawal penalty prior to age 59½, and minimum withdrawals are required after age 70½.
On the other hand, Roth IRA contributions are never deductible, but distributions are typically tax-free.
Your age and participation in a qualified plan will impact your ability to contribute to a Roth IRA, but your ability to contribute is phased out at $117,000 AGI for single taxpayers and $184,000 for married taxpayers.
There are no required minimum distributions from a Roth IRA; however, the earnings portion of distributions may be taxable and/or subject to a 10% penalty if the Roth was not opened for five years—depending on your age.
There are different rules for those who are under age 59½, for those between the ages of 59½ and 70½ and for those over 70½.
If you have money in a stock account or in retirement accounts, you may want to use the stock account to add money to your IRA.
At issue is whether you would need to sell the stocks first and then transfer the money to an existing IRA or whether a new one is needed.
Unfortunately, it is not as easy as transferring stocks from one account to an IRA.
The rules stipulate that IRA contributions must be made in cash. That means you can deposit a check, electronically transfer cash between accounts at different financial institutions or authorize an internal cash transfer between accounts at the same bank.
Selling some stock in a non-retirement account is an option to free up enough cash to make an IRA contribution, but NJ 101.5’s recent article, “Moving your money to an IRA,” explains that first you should look into whether a contribution to a traditional IRA or a Roth IRA is a better option.
As you can see, there is a lot more to making IRA contributions (and withdrawals) than meets the eye.
Your estate planning attorney can refer you to an experienced financial advisor, if you do not have one already.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: NJ 101.5 (September 7, 2016) “Moving your money to an IRA”