Have you made an IRA contribution for 2019 yet? Are you worried that you might not get the chance to? Well, there is good news. While you probably heard that the IRS extended the deadline for filing taxes to July 31, you probably did not know that the deadline for making a prior year contribution was pushed back to July 15. That’s three extra months! That might not seem like a big deal, but it could be for many Americans who didn’t get to make a contribution for 2019. If you didn’t get to make a contribution–and of course have the money to do so–you should strongly consider taking advantage of the extended deadline. If you already made your 2019 contribution, then no worries, just focus on your 2020 contribution. Of course, if you do take advantage of the extended contribution deadline, be sure to notify your IRA custodian of the year the contribution is for and to ensure that it is properly designated so that there are no issues with taxes or anything else that could open you to penalties. If you have questions about Roth or traditional IRA contributions, you should talk with a certified financial planner or wealth manager.
If you’ve been reading up on the SECURE Act, then you are probably well aware of the fact that it eliminated the age restriction on contributions to traditional IRAs. This is a big deal for those Americans planning to work into their 70s by allowing them to put money into their traditional IRAs while they continue working. It should be noted, though, that removal of the age restriction does not remove required minimum distribution (RMD) age requirements. That means that people will still need to begin taking RMDs from a traditional IRA at 72, even as they are still making contributions. The ability to continue making contributions can blunt the blow of having to take RMDs out of your nest egg before you really want to. It may feel a bit weird having money coming in and out at the same time when it comes to your retirement accounts, but it can also be a good feeling. It can be nice knowing that you can continue to work and still build up your nest egg. Furthermore, future generations may continue to push these age restrictions, especially as medicine and planning allow people to live longer and thus work longer (it’s debatable whether that’s for good or bad reasons). If you plan to work well into your 70s and take advantage of the ability to continue contributing to a traditional IRA, you should speak with a certified financial planner or wealth manager to make sure it’s the right decision for you.
I’ve written about the SECURE (Setting Every Community Up for Retirement Enhancement) Act a number of times over the past year or so. I’m writing now following it’s passing Congress last week as part of the year-end spending bill. Now that President Trump has signed it into law, it goes into effect on January 1, 2020. The legislation is a relatively large overhaul to retirement savings accounts. The two biggest changes are to contributions and required minimum distributions (RMDs). First off, the new law eliminates the age limit for traditional IRA contributions. This means that if you are still working, you can continue to contribute to a traditional IRA no matter how old you are. This can be really helpful for people who plan on working well past 70. As for RMDs, the legislation raises the age for beginning RMDs from 70 1/2 to 72. Again, this is beneficial for people who plan to work past 70 as it prevents them from having to tap into retirement accounts too early. Another big change is the ending of the Stretch IRA, which will be replaced with a ten year rule. The rule will be in place for most beneficiaries and requires accounts to be emptied by the end of the tenth year after the year of death. The change only goes into effect for deaths that occur on or after January 1, 2020. As with any legislation, the SECURE Act includes more than just the above mentioned and I suggest you read up on what the legislation offers and how it could impact your retirement plans and accounts.
We’re a little less than 10 days away from Christmas, so chances are, you’ve probably done all your holiday shopping at this point. However, if you’re looking for a few more gift ideas for your children or grandchildren, then maybe you might want to consider something with a focus on finances and money. For example, a book on personal finance can be a great gift that can help people more than they may even realize. There are many such books out there covering various aspects of personal finance, so you may want to stick with bestsellers on this. A personal finance book can make a great stocking stuffer too. If you know the person you’re buying for probably won’t read a book, then maybe consider a financial contribution to a 529 plan. While this may not bring immediate joy to a child’s face on Christmas Day, it may really help them in the future. The cost of a secondary education these days is immense and only looks to get more expensive as time goes on. Helping to get a 529 plan started for a young child or grandchild could go a long way once they graduate college and start out in the real world. It may not cover all the education expenses, but even just having a few thousand dollars less of debt can be a huge boost to a young adult. If you are retired, you can also consider making a qualified charitable distribution (QCD) to a charity in honor of a friend or family member. Not only will such a donation have a positive tax consequence, but it can also be a touching gift, especially if that person being honored has worked closely with that charity or it is a cause that they truly care about. If you have questions about 529 plan contributions or making a QCD, you should speak with a certified financial planner or wealth manager.
We are less than a month away from 2020, which means you need to start thinking about your future retirement account contributions for the upcoming 12 month period. If you have more than one retirement account, this may include deciding when and how much you will contribute to each account. For example, if you have a traditional IRA and plan to max out your contributions, will you be making the contribution in one big lump sum or do you plan to spread that contribution out throughout the year in smaller sums. If you have a retirement account with your employer, do you plan to increase your contribution amount (if you aren’t already maxing out) or do you plan to remain the same? Decisions about how much you will contribute–as well as when you will make the contributions–will be determined by your budget and finances. If, say, you have a goal of paying down a particular debt (i.e. a credit card) or know that you will be making a large purchase over the next 12 months (i.e. a used car for your teenager who just got their license), then you may want to take that into account when deciding when and how much you want to put into your retirement account. Obviously, if you are maxing out your contributions, you can’t increase them, and I’d encourage you to do everything you can to keep up those maximum contributions. However, if you feel that you may need to reign those in a bit, then you can do that too. There’s also the topic of catch-up contributions, if you find yourself of the age when you can do so. If you reach that magic age next year–or did so this past year–you may want to budget that extra catch-up amount into your planning. As always, if you have questions about your contribution amount, you should speak with a certified financial planner or wealth manager.
Did you make an IRA contribution only to later find out that your were not eligible to make that contribution? Or maybe you made a contribution and later decided that you wanted to use that money elsewhere? Whatever the reason, just know that you can essentially take back a Roth IRA or Traditional IRA contribution, provided you file the paperwork for doing so on time. The deadline for correcting an IRA contribution is October 15 of the year after you made the contribution. That might seem like a random deadline, but I can assure you it is not. It’s exactly six months after the deadline for filing your taxes, which is the amount of time you’d get after filing applicable extensions anyways. Thus, the deadline for correcting 2018 IRA contributions is October 15, 2019. Now, if you want to make a correction, you will have two options: withdraw the contribution or recharacterize it. If you are considering correcting an IRA contribution, you should speak with a certified financial planner or wealth manager to make sure you do so properly and on time. Remember, if you don’t make the correction on time, you could face a 6% penalty for an excessive contribution.
A backdoor Roth IRA conversion can be tempting if you are considering retiring early and are currently over the income limits for a Roth IRA contribution. In case you are unfamiliar, a backdoor Roth IRA conversion is where you contribute money to a traditional IRA and then convert that money into a Roth IRA. This is a useful transaction for those who earn too much income to contribute to a Roth IRA as Traditional IRAs have no income limits. It’s also a perfectly legal transaction. However, when doing a backdoor conversion, keep in mind that the taxman will get his due and that this is not a way to avoid paying taxes on IRA contributions. The money you convert will most likely count as income and you will have to pay taxes on the money in your Traditional IRA that hasn’t already been taxed. It’s also important to understand how the IRS looks at your retirement funds. If you have more than one IRA, the IRS looks at the total of your IRAs and not just the IRA you make the conversion from. This can really pose a problem if you have more than one IRA with a large balance and may make you walk away from doing a backdoor Roth IRA conversion if the taxes are too high. Income limits are another important thing to understand when doing a backdoor Roth IRA conversion. Doing one backdoor conversion doesn’t mean you can start making regular contributions to the newly created Roth IRA. Rather, you will need to do a backdoor conversion every year that you are over Roth IRA income limits, which can potentially be for many years, especially if you are a high-income earner early in your career. That’s a lot of backdoor conversions and that can leave you open to the possibility of making more mistakes. A mistake on a backdoor Roth IRA conversion can be costly depending on the amount you convert and it can be as much as 6% of the conversion if you do so over the income limits. Since backdoor Roth IRA conversions are not particularly common and require a lot of thought, you should seek out the advice of a certified financial planner before doing one.
Contrary to what you may think, you don’t need to earn income to be able to make contributions to an IRA. You’re probably familiar with spousal contributions, but did you know that you can make contributions from when you exercise non-qualified stock options? The taxable portion is considered taxable income for IRA purposes. If you receive alimony, that too is taxable as ordinary income and is eligible for IRA contribution. Some scholarships and fellowships may be considered taxable income, depending on reported on the W-2 form. This last one can be valuable to young savers, such as your children or grandchildren. If you have a child (or grandchild) in graduate school living on a fellowship or scholarship money, you may want to see if that money is considered taxable income. If it is, you should talk to them about either setting up an IRA or, if they already have one, making a contribution. This could go a long way towards getting them on the right track towards retirement early on. If you have questions have whether or not something is considered taxable income or whether you are in a position to make a contribution to your IRA, you should speak with a certified financial planner.
Did you know that if you retire, but your spouse continues to work, that you can still make a spousal contribution to an IRA? And no, you do not need to open another account to start making such contributions. So long as your spouse earns enough income to cover the 2019 contribution limits for the both of you, a spousal contribution to your own Roth IRA can be made. It doesn’t matter who the money comes from–it could be written by you or your spouse–you just need to file a joint federal tax return and your spouse needs to meet the required income limits (along with any other requirements). Spousal contributions can be a great way to build up your IRA if you retire earlier than your spouse or if you are a stay-at-home parent. If you have questions about spousal contributions you should speak with either a certified financial planner or with the custodian of the account which you plan to contribute to.
You may not realize it, but you still have time to make a contribution to your IRA and still have it count for 2018. Whether it’s a traditional IRA or a Roth IRA, you have until tax day to make a contribution for the previous year. Thus, you can make a contribution anytime before April 15, 2019, and have it count as though it was made in 2018. Many people don’t realize that such an opportunity exists. However, keep in mind that the April 15 deadline is a hard deadline, which means there is no ability to extend it, unlike your taxes. If you are considering making a contribution and want to have it count on your 2018 tax return, you have just over a month at this point to do so. If you have questions about your IRA contributions and what implications they may have on your taxes, you will want to speak with either a tax professional or a certified financial planner.