IRA Trick or Treat
The Halloween holiday is approaching. This is the time of year when tiny ghosts and goblins will ring doorbells and ask, “Trick or Treat?” Which of the following IRA strategies are “treats” and which are just “tricks?”
Converting to a Roth IRA and taking tax-free distributions in retirement – TREAT!
No one likes to pay taxes before they absolutely must. However, doing a Roth conversion and choosing to pay taxes now can result in a sweet treat later. The payoff is distributions of years of tax-free earnings in retirement. Converting to a Roth IRA now locks in today’s low tax rates and reduces concerns about taxes in retirement.
Taking multiple IRA distributions with the intent to roll over the funds – TRICK!
Don’t fall for this trick in the IRA rollover rules. The once-per-year rollover rule limits 60-day rollovers between IRAs. You cannot roll over more than one distribution received during a 365-day period. Any attempt to do this will result in taxes and penalties. Avoid this whole mess by moving your IRA money via direct trustee-to-trustee transfer.
Making deductible IRA contributions and doing qualified charitable distributions (QCDs) at age 70½ or older – TRICK!
Uncle Sam has a trick up his sleeve when it comes to QCDs. If you are age 70½ and older and making deductible IRA contributions, that will reduce your tax-free QCDs. There is a complicated formula that comes into play that you will want to stay far away from. If you are doing QCDs and you are interested in continuing to grow your retirement savings, consider an employer plan or Roth IRA contribution instead.
Rolling over an employer plan to an IRA – TREAT!
Leaving a job can be a very stressful time, regardless of the circumstances. One important task that many overlook is what to do with the funds in their employer plan. A careful analysis should be done, and every situation is different. However, one strategy that should be strongly considered is an IRA rollover. IRAs offer a wide variety of investment choices, flexibility and control over your retirement savings. Plus, moving your retirement funds to an IRA continues the treat of tax-deferred growth.
By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.