Can I Still Contribute to an IRA & Get a Tax Break for 2016?

Can you contribute to your IRA and still get a tax break? Here's what you need to know.

Individual Retirement Accounts (IRAs) are an excellent means to save for retirement. You have until the tax-filing deadline (generally April 15) to make a contribution to your IRA for the previous tax year.

There are two types of IRAs: Traditional IRA and Roth IRA. The maximum contribution is the lesser of $5,500 ($6,500 for those aged 50 and over) or your earned income. This is a combined limit for all IRA contributions in a year (in either or both types). In order to contribute to a Traditional IRA, you must be under age 70½, but you can contribute to a Roth IRA at any age. You can learn more about IRAs here.

Whether you can contribute to an IRA and how much you can contribute depends primarily upon two factors: 1) your Modified Adjusted Gross Income and 2) whether you (or your spouse) participate in an employer-sponsored retirement plan.

Adjusted Gross Income (AGI) is the number listed on line 37 at the bottom of the first page of your Form 1040. In order to determine IRA contribution limits, AGI must be adjusted by adding back certain items that were deducted to arrive at AGI. Items added back to AGI include deductions taken for traditional IRA contributions, student loan interest, college tuition and fees, and some other less common items. The final result is Modified Adjusted Gross Income (MAGI).

Here’s how to know if you can deduct your IRA contributions this year.

Traditional IRA

While anyone under age 70½ with earned income can make non-deductible contributions to a Traditional IRA, deductible contributions are not as certain. If you are single and not covered by a plan at work or you are married and neither you (nor your spouse) have a plan at work, then your full contribution up to the annual limit is deductible.

However, if either you (or your spouse) participate in an employer retirement plan, your deductible IRA contributions may be limited or even completely eliminated. To determine if you are covered by work, you can look at your W-2. If there is a check next to “Retirement Plan” in Box 13, then you are covered. This chart on the IRS website illustrates deduction limits for both single and married taxpayers covered under an employer’s plan at work.

Roth IRA

While there are no age restrictions on who can contribute to a Roth IRA, there are income constraints that must be observed. Unlike Traditional IRA rules, Roth IRA regulations do not consider whether you have an employer plan. The only factor is your MAGI. Again, you can find the chart showing the income levels that affect Roth IRA contribution limits on the IRS’ website.

Kay Bailey Hutchison Spousal IRA

A Spousal IRA is not a third type of IRA but a provision for spouses without enough earned income to fully fund a Traditional or Roth IRA on their own. Named for the former United States Senator from Texas, the Kay Bailey Hutchison Spousal IRA allows a spouse with little or no earned income to have his or her own IRA account by qualifying with the working spouse’s income.

The Spousal IRA limits are the same as the Traditional and Roth limits ($5,500 or $6,500 if aged 50 or over). So the total combined contributions for both spouses are $11,000 or $13,000, if aged 50 or over. The working spouse must have earned enough money to fund both contributions.

Saving for retirement is more important than ever. (You can see if you have enough shored up here and keep tabs on your finances by viewing two of your credit scores, with updates every two weeks, on If you don’t have a retirement plan, it’s never too late to start one. But knowing the rules is a critical step for a successful plan. Tax laws are complicated, and penalties for mistakes can be costly. Make sure you seek out the guidance of a tax professional before making important financial decisions.

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5 Things You Must Know About Lifetime IRA Distributions


Individual Retirement Accounts, or IRAs, are wonderful retirement accumulation vehicles. Contributions are generally tax-deductible (with limitations), and the assets in the accounts grow without the burden of taxation until withdrawn. Distributions are generally taxed the same as earned income. Roth IRAs are similar to Traditional IRAs in that the account also grows free of income taxation. However, contributions are not tax-deductible and qualified distributions are generally income-tax free. For the purpose of this discussion, I will primarily focus on lifetime traditional IRA distributions.

1. There Is a 10% Penalty Tax

Since Congress designed IRAs for retirement needs, and not for pre-retirement vacations or mid-life crisis Porsches, there is a 10% penalty tax imposed on the taxable portion of withdrawals taken prior to age 59½ (with a few limited exceptions). While the pre-59½ rule limits early distributions, there is also a rule that forces distributions to be taken later in life. This rule prevents the accountholder from overusing the tax deferral provided by the plan. Generally, April 1st of the year after the accountholder turns age 70½ is the Required Beginning Date (RBD) for withdrawals. This is when the first Required Minimum Distribution (RMD) from the plan is due. An individual reaches age 70½ six months following their 70th birthday. If you turn age 70 between January 1 and June 30, you will turn 70½ during that calendar year. If your birthday is between July 1 and December 31, you will turn 70½ in the following calendar year.

2. The RMD Must Be Taken Annually

The RMD must be taken annually by December 31 each year thereafter using the year-end value of the IRA of the previous year. It is important to note that the first RMD can be taken in the actual year that the participant turns 70½. The following year’s April 1st deadline is actually sort of a first-year grace period. If the first RMD is delayed until April 1st (as opposed to taken by December 31 of the 70½ year), another RMD is due by December 31 of that same year. So it may actually make sense to take the first RMD by December 31 of the year in which the participant actually turns 70½ instead of waiting to avoid two withdrawals in the same calendar year and possibly increase taxation by potentially pushing the participant into a higher tax bracket.

3. There Is a 50% Penalty If the Accountholder Doesn’t Take the RMD

If the accountholder does not take the required minimum amount, a 50% penalty is imposed on the portion of the required amount that was not taken. That is not a typographical error. The penalty is really 50%. This penalty is in addition to the normal income tax payable on the distribution. The purpose of this Required Minimum Distribution, at least theoretically, is to liquidate the entire balance of the retirement account by the end of the participant’s lifetime. In order to do this, the IRS has developed three Life Expectancy Tables (see below). Table I applies to RMDs after the death of the participant, while Tables II and III applies to required distributions during the participant’s lifetime.

4. There’s a Specific Way to Determine the Lifetime RMD

The lifetime RMD is determined by dividing the account balance as of December 31 of the previous year by the factor on Table III of the IRS Publication 590 Life Expectancy Tables, corresponding to the age of the account owner. If, however, the sole beneficiary of the account for the entire year is a spouse who is more than 10 years younger than the participant, Table II must be used. For subsequent years, the new attained age for that year is used to determine a new RMD divisor in the same Table that was used in the first year. In other words, increase the age by one year and look up the corresponding new life expectancy factor each year.

5. Lifetime RMDs Do Not Apply to Roth IRAs

It is important to note that the lifetime RMDs generally apply to Traditional, SEP, and SIMPLE IRAs, but do not apply Roth IRAs. (The RMD rules vary somewhat for employer-sponsored retirement plans like 401Ks, 403Bs, pension plans, and government plans, which are not covered in this discussion.) If the participant owns multiple IRAs, the values must be combined to determine the correct RMD, but withdrawals can come from any or all of the accounts.

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What Should I Do if My 401K Stinks?


Q. I don’t think I have good investment choices in my 401K plan, but I’ve always saved the max. Does it make sense to save to an IRA instead and put the rest in some other kind of account where I can choose the investments? — Analyzing

A. There’s a lot to consider here.

If your employer offers a 401K and will match a percentage of your contributions, you should definitely take advantage of it, said Lisa McKnight, a certified financial planner with Lassus Wherley in New Providence.

She said most employers offer a matching contribution up to a certain percentage of your salary.

“For example, if your employer will match your 401K contributions up to 6% of your salary, you should always contribute at least 6%,” McKnight said. “That’s equivalent to a 100% return on investment.”

It would take years in an IRA to achieve that same 100% return, she said.

Over time, those contributions compound, leading to far more growth over the long term.

Next, consider taxes.

All the money you contribute to a 401K is pre-tax, she said. You are not taxed on that money during the year that you earn it. Rather, it is taxed when you withdraw it in retirement.

McKnight said in 2016, you can contribute up to $18,000 of pre-tax money to a 401K and if you are over 50, you can contribute an additional catch up contribution of $6,000.

She said saving to a 401K is easy and disciplined with automatic payroll deductions.

As you noted, in a company-provided 401K, you are limited to choosing among the investment choices, typically mutual funds, that the plan offers.

“While your company may give you information about the funds, you’ll need to figure out which ones are best for you,” she said. “Since you’re bearing all the risk, it’s important that you choose wisely.”

McKnight said although you are limited to the funds within the plan, you do have control over which ones and the types of investments to use.

These should be based on your risk tolerance and investment horizon, she said.

She said your employer may offer tools to help you familiarize yourself with the risk/reward relationships. You will want to familiarize yourself with your choices.

“There should be a few target date funds, stock and bond funds and blended funds,” McKnight said. “Within each of these categories, there should be a number of funds to choose from, each with a different investment strategy and level of risk.”

If you do not feel comfortable choosing your own funds, then a target date fund may be the way to go.

“Target date funds will align with retirement dates such as Target 2020, Target 2025, etc.,” she said “These funds invest more conservatively as you near your retirement date.”

Target date funds are great options for people who want to invest in a fund that will automatically adjust the overall risk level as they near retirement, McKnight said.

Even if you end up investing in a target date fund, you may still want to invest in some other funds to further diversify your portfolio, she said.

There are funds that focus on a wide variety of different investments, all with differing levels of risk. You will likely have options that include funds that focus on international stocks, emerging markets or real estate.

If you are more of a do-it-yourselfer and want to choose your own funds, she recommends you look for index funds.

Most plans will have a handful of index funds.

“Index funds are style specific, low cost and track the performance of various indexes, such as the S&P 500, Russell 2000 or the EAFE,” McKnight said. “If your plan offers several low cost index fund choices, perhaps an S&P 500 or total stock market index fund, an international stock index fund and a bond index fund there is enough variety to serve as the core of a diversified portfolio — the division of your funds between stocks and bonds.”

If you are stuck with choosing from investment options consisting only of actively managed funds, she suggests you pick the ones in each asset class with the lowest expense ratio.

“Avoid all funds that hit you with a sales charge,” she said.

Additionally, you will want to avoid company stock, she said. Some companies encourage the purchase of company stock in 401K plans, and they may even make matching contributions in company stock.

McKnight said you should avoid purchasing company stock.

“You are already invested because you depend on your company for your paycheck. It would be a financial blow if your company went out of business and you lost your job,” she said. “Don’t compound that risk by adding company stock to your 401K plan.”

Now let’s look at IRAs.

McKnight said if you have a poor 401K plan and your employer does not make any matching contribution, you may want to consider participating in a self-directed plan such as an IRA or Roth IRA, or you can save to both.

She said you don’t have to choose between an IRA and a 401K as long as you are qualified and you heed contribution and income limits.

Be aware that there are restrictions with IRAs and Roth IRAs such as contribution and income limits.

“If you are able to participate in an employer-sponsored plan, then the deductibility of your IRA contributions will be subject to income limits,” McKnight said. If your income is too high, you cannot deduct contributions.

In 2016, your ability to deduct contributions to a traditional IRA begins to phase out if you earn more than $61,000 as a single tax filer or $98,000 if you’re part of a married couple filing jointly.

Roth IRAs do not provide a tax deduction for deposits, but allow you to withdraw money tax-free in retirement, McKnight said.

There are income eligibility limits starting at $116,000 for single taxpayers and $183,000 for married couples filing jointly. Those with earnings less than the income limits are eligible to deposit up to $5,500 into an IRA or Roth IRA in 2016. Those age 50 and older are able to deposit up to $6,500 in their account for the year.

Those above the income limits can still contribute up to the maximum to an IRA, but lose the ability to deduct the contribution, she said.

One drawback of an IRA is that it doesn’t offer the same level of creditor protection as a 401K plan, McKnight said.

Another downside of IRAs is that the onus is on you to vet investment options, she said.

“Most 401K plans offer a limited number of investment options, whereas with an IRA you are open to a much larger universe of investments,” she said. “It is your responsibility to vet and choose wisely.”

McKnight recommends you be aware of high fees and avoid higher-priced commissionable products. Your IRA may end up being more expensive than it needs to be.

Despite these restrictions, an IRA does offer more freedom of where you want your money to go, McKnight said.

Both are great tax-advantaged ways to save for retirement.

“Regularly contributing to either one is a great way to grow your investments for retirement. The more you contribute, the more your assets can compound over time,” she said. “You should strongly consider maxing out your contributions, especially if they are eligible for an employer match.”

McKnight suggests you consider the following:

1. If your employer offers a company match, then first fund your 401K up to the point where you get the maximum matching dollars.

2. Direct the next investing dollars to an IRA — a traditional IRA for upfront tax deductions or to a Roth IRA to get a tax break in retirement when you start making withdrawals.

3. After maxing out the IRA, return to your 401K plan to take advantage of the higher contribution limits and the higher current year income tax break.

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Can Retiring to Another Country Help Me Save Money on My Taxes?


Q. I’ve heard that tax-wise, moving out of the country when you retire is a good idea. I have no kids so I’m open to the idea. What places — warm weather — could make sense? I would still stay a few months in America.

— Thinking [in New Jersey]

A. Whoa! Moving out of the country to avoid taxes is an extreme move. Let’s take a step back and look at the big picture.

“The nice thing about living in New Jersey is that virtually every state in the nation will be less taxing and less expensive to live — maybe with the exception of California, New York and Connecticut, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, New Jersey.

He said you should never move anywhere for tax purposes. Instead, you should move because you really want to and it fits your lifestyle.

Lynch said even if you move out of the country and become a resident of another country, it will not eliminate taxes that you pay in the U.S.

For example, he said, your IRA distributions, pensions and Social Security are still subject to federal income tax.

“Taking your IRAs and pension as a lump sum before you leave means that you will lose half in state and federal income taxes,” he said.

The benefit of many of these warm weather islands is that the cost of living is substantially less then the cost of living in New Jersey, but there are other things to consider, Lynch said.

The number one issue is health care.

“I would not want to have emergency surgery in many of these areas,” he said.

There are other potential drawbacks.

“These islands may have great seafood, but I like a steak and a pizza every once in a while as well,” he said. “Also, getting off these islands when they have big storms is not as easy as it is here. Things are different and you need to see if long-term it fits what you want.”

Lynch suggests you take a few steps before you go any further.

Start with doing a financial plan to see if the numbers work if you stay in New Jersey.

“If yes, and you have no kids to leave your money to, then option No. 1 is stay here,” Lynch said. “Option No. 2 would be if it doesn’t work by staying in New Jersey, can it work in other areas of the U.S. that are less expensive.?”

Next, he said, make a list of what you are looking for in retirement.

“Cost of living is definitely an issue, but medical care, physical activities — golf, tennis, etc. — people your age, etc.,” he said. “You need to take the emotion out of this decision as everyone on vacation never wants to go home.”

He said the reality is living there is much different then visiting for a few weeks.

“If you really do want to move, sit with a certified public accountant who is familiar with these types of moves and develop a long-term tax plan that will discuss the issues and work on some alternatives,” he said.

And if you decide you really want to move outside the U.S., he recommends you rent for a year and make sure it is what you are looking for.

“Stick your toe in before you jump into the deep end,” he said.

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The Critical Money Choices You Should Make in Your 70s


You’ve reached 70, and you’ve got it all figured out. You’ve finally said goodbye to having to work for income, you’re in an easy routine and everything is going well. Then you hit 70½, and the IRS requires you to start taking distributions from your retirement plan, even if you don’t need the money. The agency slaps a hefty penalty on any amount not taken. So, no matter how comfortable you feel, your 70s are not the decade to take your eye off the ball.

Required minimum distributions, or RMDs, begin in the year you turn 70½. Technically, you have until April 1 of the year following the year you turn 70½ to take your first distribution. This is the point at which the federal government no longer lets you kick the tax can down the road. Pushing your first distribution into the following year means you’ll have to take two RMDs in one year, which may have adverse tax consequences. You’ll be responsible for adding the values of your retirement accounts and dividing them by your age factor on what’s called the “uniform lifetime table.” Essentially you are required to take 3.65% of your retirement account balances as of December 31 of the previous year. Each year, that percentage will increase slightly.

As always, there are exceptions to the rules. Often, the way you take RMDs from IRAs will differ from how you take them from employer-based plans. With IRAs you are in complete control of when during the year you take your RMD. You also can choose which account you take it from, as long as the total distribution is the correct percentage for your age. With employer-based plans, you typically must choose between a monthly and annual distribution schedule. The checks come automatically. While this can help you avoid missing the deadline, it usually prevents you from controlling what you sell.

There are exceptions for those still working. If you are employed at 70½ and don’t own 5% or more of the company, you are not required to take a distribution from that employer’s retirement account.

What if you’re sitting on a beach and miss your distribution? The IRS can slap you with a heavy penalty: 50% of the amount you were supposed to take. Let’s say you have $1 million in your various IRAs. Your first RMD will be 3.65% ($36,500). If you miss that distribution, the IRS penalty will be $18,250. You read that right: $18,250.

The good news is that the IRS may let you slide once. If you’re reading this a little too late, you should take the distribution, file Form 5329 and beg for forgiveness. I’d also recommend bringing on a Certified Public Accountant (CPA) for assistance. By the way, the beach may not be a good enough excuse.

How to Avoid Mistakes 

Now that we have outlined a few of the mistakes you can make, let’s highlight some of the ways to avoid those mistakes. The first is consolidation. If you’re 70 years old with five traditional IRAs, it’s time to consider consolidation. Not only will this make it easier for you to figure out your RMDs, it will also make your money easier to manage. If you want to adjust your portfolio, you can do it in one shot rather than riding around town or spending all day on hold with fund companies to make sure all accounts have been adjusted. The final benefit of consolidation is more of a benefit to your heirs because the more accounts you have, the longer and, usually the more expensive, it is for your personal representatives to sort everything out.

I believe, as do most estate planning attorneys, that everyone over the age of 18 should have at least a basic estate plan. Once you have kids, it’s time to get serious with a will or trust package. Unfortunately, half of the folks I meet with (who are all 55 or older) have not adjusted their estate plan since their children were born. You should be checking with your attorney at least every five years to make sure your documents are sound. If you’ve moved to a different state, you’ll almost certainly have to have your documents redrafted by a local attorney.

Part of that estate plan is making sure your accounts are properly titled and your named beneficiaries are aligned with your goals. In order to minimize your probate estate and pass assets directly to beneficiaries at your death, you should consider trust ownership, certain types of joint ownership or Pay On Death/ Transfer On Death designations. You should update your beneficiaries annually as part of your financial plan.

Gifting, whether it be to a charity you care about or to a younger generation, can be one of the most fulfilling financial moves you make. Remember (I know you weren’t paying attention) when the flight attendant told you to secure your own oxygen mask before assisting others? The advice is the same for gifting. You must be absolutely sure that your own financial needs are taken care of before you start distribution. You can accomplish this through a financial plan. Federal law allows you to give $14,000 a year to anyone you want to without filing a gift tax return. If you’re married, you can do twice that through what’s called a split gift. Section 529 plans are a great way to help fund education, and they come with many tax advantages. Charitable giving is a great way not only to fulfill philanthropic goals but to lessen the tax sting. Have your financial planner, CPA and estate attorney work together if you have complex goals. (Full disclosure: I am a CFP.)

Now that you’ve checked your planning boxes, it’s time to start talking about them. The sad reality is that every day you come closer to your life expectancy and someone else taking over your financial affairs. Being private about your money is no longer wise. I urge you to talk to your spouse, children and anyone else who may handle your estate when your time comes. Introduce them to your planner, attorney and accountant if there is complexity. Oh yeah, and enjoy your retirement; 70 is the new 40!

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Retirement Accounts: What You Need to Understand


With mounting concerns over Social Security, and a languishing number pensions, it’s more important than ever to start investing for retirement. Tax advantaged retirement accounts offer investors the best opportunities to see their investments grow, but the accounts come with fine print. These are the things you need to know before you start investing.

What are employer sponsored retirement accounts?

Employee sponsored retirement accounts often allows you to invest pre-tax dollars in an account that grows tax-free until a person takes a distribution. In some cases, you may have access to a Roth retirement account which allows you to contribute post-tax dollars. Contributions to employer sponsored retirement accounts come directly from your paycheck.

The most common employee sponsored retirement accounts are defined contribution plans including a 401(k), 403(b), 457, and Government Thrift Savings Plan (TSP). Private sector companies operate 401(k)s, public schools and certain non-profit organizations offer 403(b)s, state and local governments offer 457 plans, and the Federal government offers a TSP. Despite the variety of names, these plans operate the same way.

According to the Bureau of Labor Statistics, 61% of people employed in the private sector had access to a retirement plan, but just 71% of eligible employees participated.

How much can I contribute? 

If you’re enrolled in a 401(k), 403(b), 457, or TSP, then you can invest up to $18,000 dollars to your employer sponsored retirement accounts per year in 2016. If you qualify for multiple employer sponsored plans, then you may invest a maximum of $18,000 across all your defined contribution plans. People over age 50 may contribute an additional $6,000 in “catch-up” contributions or $3,000 to a SIMPLE 401(k).

In addition to your contributions, some employers match contributions up to a certain percentage of an employee’s salary. Visit your human resources department to learn about your company’s plan details including whether or not they offer a match.

What are the benefits of investing in an employer sponsored retirement plan?

For employees that receive a matching contribution, investing enough to receive the full match offers unparalleled wealth building power, but even without a match, employer sponsored plans make it easy to build wealth through investing. The funds to invest come directly out of your paycheck, and the plan invests them right away.

However, there are fees associated with these accounts. Specific fees vary from plan to plan, so check your company’s fee structure to understand the details, especially if you aren’t receiving a match. If you don’t have an employer match, then it may make more sense to contribute to your own IRA in lieu of the employer-sponsored plan.

Investing in an employer sponsored means getting to defer taxes until you withdraw your investment. Selling investments in a retirement plan does not trigger a taxable event, nor does receiving dividends. These tax benefits provide an important boost for you to maximize your net worth.

In addition to tax deferred growth, low income investors qualify for a tax credit when they contribute to a retirement plan. Single filers who earn less than $41,625 or married couples who earn less than $61,500 qualify for a Saver’s Tax Credit worth 10-50% of elective contributions up to $2000 ($4000 for married filers).

What are the drawbacks to investing in an employer sponsored retirement plan?

Investing in an employer sponsored retirement plan reduces the accessibility of the invested money. The IRS punishes distributions before the age of 59 ½ with a 10% early withdrawal penalty. These penalties come on top of the income taxes that you must pay the year you take a distribution. In most cases, if you withdraw money early pay so much in penalties and increased income tax rates (during the year you take the distribution) that you would have been better off not investing in the first place.

Additionally, investing in an employee sponsored retirement plan reduces investment choices. You may not be able to find investment options that fit your investing style through their company’s plan.

Should I take a loan against my 401(k) balance?

Since money in 401(k) plans isn’t liquid, some companies allow you  to take a loan against your 401(k). These loans tend to be low interest and convenient to obtain, but the loans come with risks that traditional loans do not have. If your job is terminated, most plans offer just 60-90 days to pay off the loan balance, or the loan becomes a taxable distribution that is subject to the 10% early withdrawal penalty and income tax.

It is best to only consider a 401(k) loan for a short term liquidity need or to avoid them altogether.

What if I don’t qualify for an employer sponsored retirement plan?

If you’re an employee, and you don’t have access to an employer sponsored retirement plan you have to forgo the tax savings and other benefits associated with the accounts, but you may still qualify for an Individual Retirement Account (IRA).

However, if you pay self-employment taxes then you can create your own retirement plan. Self-employed people (including people who are both self-employed and traditionally employed) can start either a Solo 401(k) or a SEP-IRA.

A Solo 401(k) allows an elective contribution limit of 100% of self-employment income up to $18,000 (plus an additional $6000 in catch up contributions for people over age 50) plus if your self-employed, then you can contribute 20% of your operating income after deducting your elective contributions and half of your self-employment tax deductions (up to an additional $35,000).

If you qualify for both a Solo 401(k) and other employer sponsored retirement plan, then you cannot contribute more than $18,000 in elective contributions among your various plans.

A SEP-IRA allows you to contribute 25% of your self-employed operating income into a pre-tax account up to $53,000.

What are Individual Retirement Accounts?

Individual Retirement Accounts (IRAs) allow you to invest in tax advantaged accounts. Traditional IRAs allows you to deduct your investments from your income, and your investments grow tax free until they are withdrawn (at which point they are subject to income tax). You can contribute after-tax money to Roth IRAs, but investments grow tax free, and the investments are not subject to income tax when they are withdrawn in retirement. There are income restrictions on being eligible for deductions and these vary based on household income and if an employer-sponsored retirement plan is available to you (and/or your spouse).

What are the rules for contributing to an IRA?

In order to contribute to an individual retirement account, you must meet income thresholds in a given year, and you may not contribute more than you earn in a given year. The maximum contribution to an IRA is $5500 ($6500 for people over age 50).

A traditional IRA allows you to defer income taxes until you take a distribution. Single filers who earn less than $61,000 are eligible deduct one hundred percent of deductions, and single filers who earn between $61,000 and $71,00 may partially deduct the contributions. Couples who are married filing jointly may make contribute the maximum if they earn less than $98,000, and they may make partial contributions if they earn between $98,000 and $118,000.

Roth IRAs allow participants to invest after tax dollars that are not subject to taxes again. The tax free growth and distributions can be especially beneficial for those who expect to earn a high income (from investments, pensions or work) during retirement. Single filers who earn less than $117,000 can contribute the full $5,500, and those who earn between $117,000 and $132,000 can make partial contributions. Couples who are married filing jointly who earn less than $184,000 may contribute up to $5500 each to Roth IRAs, and couples who earn between $184,000 and $194,000 are eligible for partial contributions.

What are the benefits to investing in an IRA?

The primary benefits to investing in an IRA are tax related. Traditional IRAs allow you to avoid paying income taxes on your investments until you are retired. Most people fall into a lower income tax bracket in retirement than during their working years, so the tax savings can be significant.  Roth IRA contributions are subject to taxes the year they are contributed, but the IRS never taxes them again. Investments within an IRA grow tax free, and buying and selling investments within an IRA does not trigger a taxable event.

Additionally, low income investors also qualify for a tax credit when they contribute to a retirement plan. Single filers who earn less than $41,625 or married couples who earn less than $61,500 qualify for a Saver’s Tax Credit worth 10-50% of elective contributions up to $2000 ($4000 for married filers).

IRAs also allow individuals to choose any investments that fit their strategy.

What are the drawbacks to investing in an IRA? 

Investing in an IRA reduces the accessibility of money. Though it is possible to withdraw contribution money for some qualified expenses, many distributions are to be subject to a 10% early withdrawal tax penalty when a person takes a distribution before the age of 59 ½. In addition to the penalty, the IRS levies income tax on distributions the year that you take a distribution from a Traditional IRA.

Should I withdraw money from my IRA?

Taking a distribution from an IRA means less money growing for retirement, but many people use distributions from IRAs to meet medium term goals or to resolve short term financial crises. The IRS publishes a complete list of qualified exceptions to the early withdrawal penalty.

If you have to pay the penalty, withdrawing from an IRA is not likely to be the right choice. Once the money is withdrawn from an IRA it can’t be contributed again. For short term needs, taking out a loan usually comes out ahead.

What’s the smartest way to invest?

Investing between 15-20% of your gross income for 30 years often yields a reasonable retirement nest egg, but even if you can’t invest that much right now, it’s important to get started. The smartest place to invest for retirement is within a tax advantaged retirement account.

If you don’t have access to an employer sponsored plan the best place to start is by investing in an IRA. On the other hand, if you have access to both an employer sponsored plan and an IRA, the answer is not as clear. Anyone who has an employer with a matching policy should aim to invest enough to take full advantage of any matching plan that your company has in place.

After taking advantage of a match, the next best option depends on your personal situation.

Employer sponsored plans and Traditional IRAs offer immediate tax benefits that can be advantageous for high income earners. However, investing in a Roth IRA keeps money more liquid than either an employer sponsored plan or a traditional IRA.

Of course, the best possible scenario for your retirement is to maximize contributions to both an employer sponsored account and an individual retirement account, but you should carefully weigh how investing in these accounts affects your whole financial picture and not just your retirement goals.

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5 Questions to Ask Before Choosing the Right IRA Provider

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Choosing the right IRA provider can be challenging, especially when you don’t know what you should be looking for when choosing one. Let’s help you cut through the confusing financial jargon and focus on what you should be aware of when making this important decision.

You’ve finally determined that an IRA is the right move for you… now what?

The internet can be a great place to find information, products and services, however, there is no good way to separate the helpful advice from the misinformation. And, that’s why it’s so important to know what questions to ask. Here are the key areas to focus on when choosing your IRA provider.

1. What investment options are available on the platform?

If you already have or are looking to open an IRA, you probably understand the value of saving for retirement. The goal is to save (and hopefully grow) your money for the future. In order to set yourself up for success, it’s important to choose the appropriate investments for you.

We aren’t going to get into the details about determining which investments to choose, but we will look at what options are available on various platforms. Depending on which provider you choose, you may have access to a number of investment options including money market accounts, CDs, mutual funds, exchange traded funds, stocks, and bonds (this list could go on, but these are the most common options).

Each of these choices will expose you to varying degrees of risk and it is important to choose a platform that suits your needs. Some banks might allow you to open an IRA, but they may not have options outside of a basic interest bearing account, like a money market or a CD. These types of accounts are fine if your goal is to not lose money. The problem is that the interest rates are so low that you will have a difficult time beating inflation over time. The end result is that you will be losing buying power, which is a fancy way of saying that prices on products and services will rise faster than your money.

Other platforms like Fidelity, Vanguard or TD Ameritrade, will provide basic interest bearing options as well as investments that provide exposure to the stock market in the form of stocks, bonds, mutual funds and exchange traded funds (ETFs). These investments can allow you to design a diversified investment portfolio that can potentially grow your money for the long term.

Overall, you want to find a platform with a variety of investment options, ranging from the basic money market account, to index funds, target date funds (funds with a retirement year in the name that automatically move from aggressive to conservative based on your projected year of retirement) and maybe additional mutual funds that focus on specific sectors. This last group is not necessary unless you enjoy choosing your own specific asset allocations.

CFP opinion: Investments (other than stocks and bonds) will come with internal fees called “expense ratios”, the average of which is about 1.2%. These fees are common, so there is no need to avoid them completely. However, there are plenty of investments that charge well below 0.50%, so unless you have a compelling reason to choose a more expensive option, I would stick with the ones with lower expense ratios.

2. What platform fees should I be aware of?

Many providers will gladly accept your money because they know that they will earn revenue from the fees they charge. These fees include account maintenance fees, transactions fees (commissions), low balance fees, account transfer/termination fees, among others.

The size of these fees will range by type; some of them will be free, while others will cost as much as $200 dollars or more.

For example, when you open an IRA with Vanguard and invest in Vanguard mutual funds or ETFs, you will not pay sales loads, 12b-1 fees or commissions. You may also avoid paying annual account service fees by setting up online account access. However, you may be paying all of these transaction fees on other platforms. These fees can range from $8 to $60 or more per trade (buying or selling an investment). Others show up in the form of a percentage of your assets (12b-1 fees). I would suggest avoiding 12b-1 fees all together, as they are hidden fees that can really eat up returns.

The downside of going with a platform like Vanguard is that you won’t gain access to more sophisticated investment options (i.e. options, futures, margin accounts). I wouldn’t recommend using these types of investments anyway unless you consider yourself an investment expert and have the time to do the ongoing research necessary to maintain such a portfolio. So, in the end, this isn’t really a negative for most people.

Many platforms will also charge an account transfer and/or account termination fee. So, if you decide that you want to move your account elsewhere, you may be hit with a $25, $50, or even a $200 charge. I don’t recommend moving your IRA account often, however, you should be aware of what to expect if you decide to make a change.

The good news is that any platform you speak with should be able to provide you with a fee schedule that will list all possible fees. This is an important step before making the decision to open an account with a specific provider. Once you know the fees, you can make an intelligent decision on whether they are worth paying for. Most fees are not worth the cost, as every dollar that goes to fees is one more dollar that can’t be invested. Over time, this can add up to a lot of wasted money.

CFP opinion: I suggest finding a platform that charges very few fees. Choose one that will not charge transaction fees, low balance fees or other commissions. Ideally, you will also find one that does not charge IRA custodian fees. The one acceptable fee is an account termination fee, as the goal is to minimize the amount of times you move your account anyway. I would keep this fee under $100 just in case you do need to move it.

3. What about advisory fees?

Depending on where and how you open your account, you may also pay a financial advisor a fee to manage the account. This often comes into play when you are working directly with an advisor to manage your investments. This fee should be disclosed by your adviser at the onset of the relationship, however, don’t assume that it will be clear. The fee can range from 0.10% to as high as 2%+ depending on the advisor’s company and the way they charge (fee or commission).

Make it a point to ask how much you are being charged and what the fee covers. There are many reasons to pay a financial advisor to manage your investments, but you must be clear on the value you receive for the fee. If it’s not clear to you, don’t pay the fee.

CFP opinion: If you would like to work with an advisor, find a fee-only fiduciary who has your best interests in mind. Don’t pay more than a 1% advisory fee for your investments. There are plenty of excellent advisors out there who will charge this rate or less.

4. Are cash bonus offerings worth it?

Some platforms might offer special cash bonuses for opening an IRA and investing a certain amount of money within a period of time. Getting free money might sound great, but make sure to read the fine print and be aware of the above questions before moving forward. For example, Ally Bank is offering $500 if you open an account and rollover $200,000 from another retirement account.

Transferring that amount of money will be a roadblock for most people, however, even if you can do it, the bonus isn’t that great. It adds up to 0.25% (or less) of the account value. Also, you won’t have access to investments, only CDs and other interest bearing accounts with interest rates below 2%. Ally is a great banking option, but doesn’t have the options and flexibility most people require in an IRA.

Other platforms might offer the bonus but require you to invest in an annuity or keep your money in the account for a certain amount of years. If the rules aren’t followed, you can be hit with some pretty harsh penalties of up to 10% of your account balance.

CFP opinion: Don’t choose the platform based on the bonus. If you would select the platform with or without the bonus, then it might be a good option. It shouldn’t be one of the major determining factors.

5. Is the platform easy to use?

You should also ask to take a test drive on the platform. Many providers will (virtually) walk you through the online experience or point you to a video that will show you what to expect. Pay attention to how easy (or difficult) it is to access and make changes to your account. If you find that the platform is clunky, this may be a good reason to go elsewhere. With so many technological advances in the past 10 years, you should be able to see your account activity and investment allocations online from anywhere in the world.

As with all financial choices you make, it’s important to understand your specific goals and intentions for your IRA money. The best option for you will vary depending on your goals, age, wealth level, time horizon and risk tolerance. In general, you should look for an easy to use platform with online access, low fees, a variety of investment options and great customer service. It’s important to feel comfortable with all aspects, as you don’t want any excuse for ignoring your retirement money. Consistently contributing to and managing your money is paramount to a successful retirement.

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3 Best Low-Fee IRA Providers

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The best investors get a few key things right. They:

  1. Save enough money
  2. Contribute to the right accounts
  3. Choose solid investments
  4. Minimize costs

That last point may seem counterintuitive – after all, we’re used to paying more for quality – but it’s one of the most important parts of your plan. The less you pay for your investments, the more likely you are to get positive returns. That’s just the way it is.

So when you’re making a decision like where to open your IRA, cost is one of the first things you should consider.

Here are a number of low-fee IRA providers that will maximize your odds of success.

Investment Companies

Many of the companies that create the mutual funds and ETFs you might select on other platforms also allow you to open IRAs and other investment accounts with them directly. This is a great way to minimize your costs, especially if you’re willing to invest primarily or exclusively in that company’s funds.

For example, your 401(k) through work may offer Vanguard funds. But you don’t need to be working through a third-party provider to get access to Vanguard funds. You can invest directly with Vanguard and cut out the fees of the middleman. That isn’t to say we discourage you from investing in your company’s 401(k), especially if there is an employer match.

These companies also typically have platforms that allow you to invest in other funds as well, and in many cases the fees to do so are highly competitive.

Here are some of your best options.

1. Vanguard

Vanguard is the industry’s leading provider of mutual funds and ETFs, primarily because its products are both high-quality and low-cost.

And if you open an IRA directly with Vanguard you get access to their world-class funds without any trading fees. There is a $20 annual account maintenance fee, but that’s waived if you agree to electronic delivery of account statements.

Vanguard also have a robust platform for trading other mutual funds and ETFs, with the cost per trade typically ranging from $0 for certain mutual funds to $35 at the high end. You can see a full list of fees here.

2. Schwab

Similar to Vanguard, Schwab is free if you stick to their funds. There is a $1,000 account minimum, but that’s waived if you set up a monthly automatic investment of at least $100.

It also has a large selection of non-Schwab ETFs that you can trade commission-free as well.

The cost to trade other ETFs ranges from $8.95-$33.95, and for mutual funds ranges from $0-$76. You can see a full outline of the fees here.

3. Fidelity

Fidelity is another good option here. Like the others there is no cost to trade its own funds and no account maintenance fee. There is a $50 fee if you choose to close your IRA though.

One downside is that many of Fidelity’s mutual funds have a $2,500 minimum initial investment, and in many cases the funds themselves are more expensive than Vanguard’s and Schwab’s.

It does, however, have an ETF platform that allows you to trade iShares ETFs at no cost. Other non-Fidelity ETF trades are $7.95 and mutual funds range from $0-$49.95 per trade.

A full outline of fees can be found here.

Automated Investing Platforms

Automated investing platforms, or “robo-advisors”, have made it even easier to quickly get up and running with a solid investment portfolio at a low cost.

We recently did a thorough review of these platforms, which you can find here: Which Robo-Advisor Has the Lowest Fees?

But here’s a quick summary of your options:

  • Betterment – Portfolio fees of about 0.10% and management fees of 0.15%-0.35%. There is a minimum $3 per month fee if your account balance is less than $10,000 and you do not set up automatic contributions of at least $100 per month.
  • WiseBanyan – Portfolio fees of about 0.09% with no management fees. There is an extra cost for features like tax loss harvesting.
  • WealthFront – Portfolio fees of about 0.16% and management fees of 0.25%. The management fee is waived for balances under $10,000, but there is a $500 minimum investment.
  • Schwab – Portfolios fees of 0.18%-0.26% with no management fee. Schwab is able to do this because they are primarily recommending its proprietary funds, from which it already receives a management fee.

Discount Brokerages

The options above are likely the easiest way to get started quickly at a low cost. But if you’re looking for something else, there are a number of discount brokerages to choose from. The downside of these brokerages is that there are fewer free investment options and it’s a little more complicated to get up and running. But they may offer specific features that appeal to your needs.

  • TD Ameritrade – No account maintenance fee, though it costs $75 to close your account. It offers many commission-free ETFs and mutual funds. Otherwise ETFs are $9.99 per trade and mutual funds are $49 per trade. Full fees detailed here.
  • E-Trade – No account maintenance fee. A number of commission-free ETFs and mutual funds. Other options are $9.99 per trade for ETFs and $19.99 for mutual funds. Full fees detailed here.
  • TradeKing – No account maintenance fee, though there is a $50 fee to close your account. ETF trades starting at $4.95 and mutual fund trades at $9.95. Full fees detailed here.
  • Interactive Brokers – Requires a $5,000 minimum deposit, but its unique fee structure can save you significant money. Full fees detailed here.

How to Choose

Remember, the most important part of your investment plan is the amount you save. All of the options above are relatively low cost, so there isn’t a bad option. Choose the one that makes it easiest to get started and diligently continue saving.

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What Should I Do With My 401(k) When I Change Jobs?


When you leave a job where you previously had an employer retirement plan, you have decide what to do with the money in your account.

Option 1: Leave Your Retirement Account with Your Employer

Reasons to leave your money in the current account

You don’t have to do anything: Leaving your money with your previous employer’s plan means that you take no action, so it’s easy and you can’t mess anything up.

Might have lower price point: Your 401(k) is institutionally priced, meaning it has access to institutional funds, which are usually cheaper (compared to an IRA).

Help from a financial expert: You have access to a money manager with your 401(k), which may help you if you’re inexperienced and want guidance with your investments.

Reasons why it may be best to rollover your 401(k)

Hassle of tracking multiple accounts: If you leave your money in your old plan and open a new plan with your new employer, it may become cumbersome to keep track of all your accounts. It would be easier to have all your accounts in one place.

Keep your goals in mind: If you are rebalancing your overall retirement portfolio for a certain asset allocation, it may become difficult to make sure all of the investments align and are allocated consistently with several accounts.

Risk forgetting an account: You may lose interest and forget about managing this account after you leave the company.

You might not have an option: You have to make sure this is an option because some plans won’t allow you to stay after you leave (it costs them money to administer your account). Typically, you have to have a minimum amount invested in order to remain in the plan.

Option 2: Rollover Your Account to an IRA

The perks of doing a rollover

You can directly transfer money in your old 401(k) to an IRA: This will give you control over your funds in your own personal, individual account. With a direct transfer, the funds move directly from the 401(k) to the IRA, without you touching the money. This is a great way to move your money from an old 401(k) and have control over the account and actively manage your retirement funds.

You may have access to a wider range of investment options: It’s possible your IRA may have more to offer as many 401(k)s have limited investment options compared to an IRA.

You continue to grow your retirement savings: on a tax-deferred basis (just like you were doing in your 401(k)).

IRAs have more flexible withdrawal options: You can access your funds more easily with an IRA compared to 401(k)s (not that you should). For example, you can withdraw up to $10,000 from your IRA for a first-time home purchase.

Reasons a rollover might not be right for you

You need to be proactive: You have to take action to get a rollover completed, which may be a turnoff. You have to know where you want to open an IRA, and you have to be willing to choose your investments. This may feel intimidating and may require more diligence than you’re interested in having.

Consequences of an indirect transfer: If you do an indirect transfer (as opposed to a direct transfer), you will receive a check for 80% of the funds in your account but be required to deposit 100% of the balance. This is because of a 20% withholding requirement for the employer. So, unless you have the additional 20% to make up in cash, you will be in big trouble if you take an indirect transfer.

If bankruptcy is a potential issue: Generally, there is greater protection against creditors for assets in an employer sponsored retirement account than in an IRA (this is not always the case, so read your state law). So, if bankruptcy is an issue, then an employer sponsored plan may be better.

Option 3: Rollover Your Account to a New Employer 401(k)

Reasons to rollover to a new 401(k)

Simplify your life: The benefit to moving your old 401(k) funds to a new employer 401(k) is that it keeps your investments organized and in one place. It will be easier for you to keep track of and manage with one retirement account.

Defer distributions: You may be able to defer taking required minimum distributions if you are still working at your job at age 70 ½. You don’t have the option to defer RMDs with an IRA or old 401(k) (you’re required to take them).

Reasons to keep your old 401(k) separate from your new 401(k)

You might not have a choice: This may not be an option because not all employers accept rollovers from an old plan.

New 401(k) may be limited: You may have more limited investment options with in your new 401(k) than in an IRA. If you want the most flexibility with investment options, then you may want to stick with an IRA.

Limited flexibility: There isn’t much flexibility with respect to withdrawal exceptions, which you have in an IRA.

Strategize before making your decision

Consider your long term investment strategy when making these decisions. If you have many years to save for retirement, you want to do what’s best for you in the long run.


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The Lesser-known Way to Save Some Money on Taxes

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Right about now is the time you’re probably chomping at the bit to figure out any and every deduction and write-off you possibly can in order to not pay an exorbitant amount of taxes this year. Business expenses, dependents, first-time home purchases … these are all things most people are already aware can help save them some cash when tax time rolls around. One thing some people might not consider, though, is how their retirement account — and specifically their IRA — can help reduce their tax obligations.

When it comes to retirement accounts, the gist with traditional IRAs is that an account holder gets to invest her money now and avoid paying any taxes on that money until the time when she takes that money out later.

More specifically, here’s how a traditional IRA works when it comes to:

  • Returns on your investment: For things like interest, dividends and capital gains, someone with a traditional IRA isn’t required to pay taxes right away, which means they might be able to save more (and earn more in interest) over the long haul than they could have if they had to account for paying taxes on top of their savings efforts.
  • Your current income: Depending on your income, marginal tax bracket and the amount of money you’re able to put into your IRA this year, you might receive a nice little deduction on the amount of earned income you claim for taxes. This is because you aren’t required to pay any income taxes on that amount until you remove the money from your IRA. In most cases, in order to qualify for this type of deduction you must not have access to an employer-sponsored retirement plan. (So someone who is self-employed, for example, would be eligible for this benefit.) The exception would be if you make less than $61,000 in any one year. In that case, you would be able to deduct your IRA contributions regardless of whether or not you have access to another retirement account through work.

All of this is to basically say, if at all possible, it’s always a fiscally responsible idea to put as much as possible (the actual amount you can put away each year changes and varies based on income, check with the IRS site to be sure) away in an IRA. This will not only help you build a more solid financial future for retirement, but it will also help you out when it comes to taxes in the present day. We like to call that a win-win situation, and it’s pretty cool when that happens.

Check out this piece for more on how traditional IRAs can help you save on taxes.

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