6 ways to get a handle on your IRA

  • By James Royal,
  • Bankrate.com
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It’s rarely a bad time to take stock of your retirement planning, but now is an ideal time to have a look at your individual retirement account, or IRA. You can make changes to last year’s contributions and get a head start on the current year’s plan.

The IRA is an excellent way to save for retirement. It’s like a special “wrapper” that goes around a normal account giving it special tax advantages, depending on the type of IRA.

The path to retirement bliss

Research shows retirees are more fulfilled when they stay engaged.

For example, a traditional IRA allows you to save for retirement with pre-tax contributions, meaning you don’t have to pay tax on any money you contribute. There are no annual taxes to pay on gains, and you can roll up these earnings tax-deferred until retirement.

With a Roth IRA, on the other hand, you’ll contribute money after tax, but any future gains are tax-free, as are any withdrawals. The taxman can’t touch your gains if you follow the rules.

Annual contributions are limited. For 2019 and 2020, you can sock away as much as $6,000 per year in your IRA. Maxing out your contribution is one way to take full advantage of the IRA.

Here are six other ways to take control of your IRA this year to help get your retirement fund on the right track.

1. There’s still time for 2019

Getting your IRA in shape for 2020 also means making sure you’ve got last year’s business wrapped up, too. And there may still be time. You have until Tax Day – April 15, 2020 – to contribute the maximum amount for the 2019 year.

If you’re opting for a traditional IRA, that’s an additional way for you to get a tax break today for saving for your own retirement. Just deposit the money into an IRA and claim the deduction.

If you haven’t maxed out your contribution for 2019, start there before you begin contributing for 2020. Then you can get going on this year’s contribution while you’re focused on saving.

2. Budget now to max your contribution

If you’re scrambling to max out your contribution this year, take that lesson to heart and begin your budgeting process earlier for 2020. Split your contributions up into manageable chunks, so that you’re not forced to come up with thousands of dollars right before the deadline.

With a limit of $6,000 for 2020, you can make monthly contributions of $500. Alternatively, you can time your IRA contributions with your biweekly paycheck, having your bank automatically deposit the money from your checking account on payday, much like a payroll deduction. You could even break it down into weekly contributions, if that works for you.

3. Put that tax refund right into your IRA

The average tax refund was more than $2,800 in 2019. That’s not found money – you worked for it! By depositing your refund check into an IRA you can already get that jump start on saving. Plus, by depositing it in a traditional IRA you’re already building in a tax break for next year, too.

So resist the urge to spend your refund check, and instead funnel it right back into your IRA.

4. Can’t get a Roth IRA? Try the back door!

Some earners simply make too much to get a Roth IRA the regular way. In 2019 if your modified adjusted gross income is more than $137,000 while filing as an individual or $203,000 as married filing jointly, then you probably can’t open a Roth IRA the regular way. (The IRS site has the full income restrictions.) Still, you can get a Roth IRA – via a method called a backdoor Roth IRA.

To create a backdoor Roth when you earn too much, first open a traditional IRA but don’t claim a deduction for your contribution. Then contact your IRA provider and request a conversion of your traditional IRA to a Roth IRA. The process can be tricky, so it can be useful to bring in a financial adviser to help you with the finer points. A misstep can cost you additional penalties.

5. But watch out for the pro-rata rule

One of the tricky parts in the Roth IRA conversion process is what’s called the pro-rata rule, and it can create a tax liability. If you have some funds in a traditional IRA already, then opening a backdoor Roth IRA may create a tax headache for you.

When you convert a portion of a traditional IRA to a Roth IRA, you must calculate the proportion of your IRA assets that have never been taxed (that is, deductible IRA contributions and earnings on them) to your total assets in IRAs. That proportion will be the amount of any Roth conversion that is taxable.

For example, imagine you have $94,000 in traditional IRAs and add $6,000 non-deductible contribution this year with the intent to convert that contribution to a backdoor Roth IRA. In this example, 94 percent of your IRA funds have not yet been taxed ($94,000 of the $100,000 you’ve contributed). Therefore, 94 percent of your $6,000 contribution, or $5,640, is taxable on conversion. If you converted the whole IRA, you’d owe taxes on the other $94,000, too.

If all your accounts are already set up as Roth IRAs, you won’t have to worry about this tricky situation. Savers have another way to avoid the pro rate rule, too – the reverse rollover.

6. Take your required minimum distributions (RMDs)

While much advice focuses on avoiding the slip-ups as we accumulate wealth, one of the biggest slip-ups can occur after we’re retired and are enjoying that wealth. If you own a traditional IRA and you’re of a certain age – now 72 for individuals who turn 70 ½ in 2020, thanks to the recently passed SECURE Act – you have to take distributions from your IRA.

These RMDs must be withdrawn from your account, and if you don’t take them, you might get hit with one of the stiffest penalties in effect from the IRA. The tax man may take a 50 percent cut of the money that should have come out but didn’t.

To make sure you’re taking out what you must, use an RMD table to calculate the amount. The table provides you a number based on your age at year-end, and you’ll divide that number into your traditional IRA assets at the end of the prior year to determine your minimum distribution. As you get older, you’re required to withdraw a higher percentage.

Bottom line

Use these tips and tricks to get the most from your IRA, and really juice the value of the retirement perks that Uncle Sam allows you. The earlier in the year that you start your planning, the easier it will be for you to save or otherwise budget to meet your financial goals.

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