Working Toward Retirement Goals With IRAs

With fewer companies offering pensions and Social Security making up a smaller percentage of the average retiree’s income, individuals have to rely more on their own savings for living in retirement. That’s where an IRA can come in: It lets you save for retirement and take advantage of tax benefits.

Similar to a qualified employer-sponsored retirement plan (QRP), such as a 401(k), 403(b), or governmental 457(b), investments in IRAs have tax-advantaged growth potential. This typically allows you to accumulate retirement savings faster than you would in a taxable account.

Even if you already participate in a QRP, you should consider investing in an IRA. It can help supplement these savings and likely give you access to a wider range of investment choices than a QRP offers.

A Traditional IRA offers tax-deferred growth potential. You pay no taxes on any investment earnings until you withdraw, or “distribute,” the money from your account, presumably in retirement.¹

Whether you can contribute to a Traditional IRA and the amount that you can deduct from your taxable income depends on a number of factors. First, you must be 70½ or younger during the tax year for which you are making the contribution. In addition:

If you’re single, you must have earned income. If you’re covered by a workplace retirement plan (WRP)², such as a 401(k), 403(b), SEP IRA, or SIMPLE IRA, the amount of your contribution you can deduct is phased out based on your modified adjusted gross income (MAGI).

If you file jointly, either you or your spouse must have earned income. If either of you is covered by a WRP², the amount you can deduct is phased out based on your MAGI.

If you file separately, you must have earned income. If you are covered by a WRP², the amount you can deduct is phased out based on your MAGI. However, you may be considered single for deductibility limits³.

Once you have reached your required beginning date (RBD), generally April 1 following the year you turn 70½, you will have to begin taking required minimum distributions (RMDs) from your Traditional, SEP, and SIMPLE IRAs. Subsequent RMDs must be taken by December 31 of each year. You will owe ordinary income tax on the taxable portion of the distributions.

A Roth IRA offers tax-free growth potential. You are eligible to contribute to a Roth IRA at any age as long as you or your spouse, if filing jointly, have earned income and your modified adjusted gross income (MAGI) is at or below the phase-out limits. Since contributions to a Roth IRA are made with after-tax dollars, there is no tax deduction, regardless of your income. Qualified distributions, which are tax-free and not included in gross income, occur when your account has been open for more than five years and any one of the following applies¹:

• You are at least age 59½.
• You are disabled.
• You are using the first-time homebuyer exception.
• The payment is made to your beneficiary after your death.

You do not have to take required minimum distributions (RMDs) from a Roth IRA during your lifetime, optimizing the opportunity to build tax-free wealth.

If your employer offers a SIMPLE IRA or SEP IRA retirement plan and you want to take advantage of it, you need to open a SIMPLE IRA or SEP IRA account to hold your plan assets.¹

A SIMPLE IRA plan lets eligible employees make contributions to their SIMPLE IRA on a pre-tax basis. In addition, the employer must make either matching or non-elective contributions.

A SEP plan lets an employer make deductible contributions for eligible employees to IRAs that plan participants have established.

Are you considering the various options for the savings you have accumulated in QRPs such as 401(k), 403(b), or governmental 457(b) plans? Know that what you choose to do with these savings can have a substantial impact on your future.

You generally have four options for your QRP distribution:

1. Roll the assets in to an IRA
2. Leave the assets in your former employer’s QRP, if the plan allows
3. Move the assets to your new/existing employer’s QRP, if the plan allows
4. Take your money out and pay the associated taxes

Each of these options has advantages and disadvantages, and the one that is best depends on your individual circumstances. You should consider features such as investment choices, fees and expenses, and services offered⁴.

It can be a confusing decision to make. Here are some things to think about:

• The difference in fees and expenses between the QRP and IRA
• When distributions can be taken with no 10% additional tax
• Your need for help making investment decisions
• The favorable tax treatment of employer securities that may have increased in value in the QRP
• When you have to begin required minimum distributions (RMDs)
• Protection of retirement assets from creditors and bankruptcy

Your Financial Advisor can help educate you regarding your choices so you can decide which one makes the most sense for your specific situation. Speak with your current retirement plan administrator and tax professional before taking any action.

You need to make your Traditional and Roth IRA contributions by the individual tax-filing deadline—typically April 15 following the year for which you’re making the contribution. Generally, there are no extensions to the contribution deadline.

Total annual contributions to a Traditional IRA, Roth IRA, or both cannot be more than the annual maximum for your age or 100% of earned income, whichever is less.

2019 tax year maximum annual contribution:

• $6,000 if you’re younger than 50
• $7,000 if you’re 50 or older within 2019

2020 tax year maximum annual contribution:

• $6,000 if you’re younger than 50
• $7,000 if you’re 50 or older within 2020

Open the Traditional IRA section (above) for information on the deductibility of your contribution and the Roth IRA section for information on contribution limits.

It is generally a good idea to maximize your IRA contribution to potentially gain the full benefit of tax-advantaged savings and increase your retirement assets.

At Wells Fargo Advisors, you can make contributions to your IRA online or using your mobile device⁵. A contribution received between January 1 and the tax-filing deadline must indicate whether it is for the current year or prior tax year. If no year is indicated, it is considered a current-year contribution.

There are a variety of reasons why you may want to convert a Traditional IRA as well as your qualified employer-sponsored retirement plan (QRP) savings to a Roth IRA, such as you:

• Are willing to pay taxes now for the possibility of tax-free distributions in retirement
• Do not want to take required minimum distributions (RMDs) during your lifetime
• Want to make contributions after age 70½ if you or your spouse, if filing jointly, have earned income (remember that modified adjusted gross income [MAGI] limits will apply)
• Live in a state without income tax but will retire to a state with income tax

To convert, you will need to pay federal and, possibly, state income tax on the taxable amount of the conversion. There is no 10% additional tax on conversions made prior to age 59½. Also, you will not have to sell the account assets as they can be converted as an “in kind” transfer.

It is important to know what your tax situation is and your ability to pay for the conversion because once you convert you cannot recharacterize or undo the conversion. Be sure to speak with your tax professional before completing a Roth IRA conversion.

You or your spouse, if filing jointly, must have earned income for the tax year for which you are making the contribution. Generally, compensation is what you earn from working such as wages, tips, or commissions. See Publication 590-A (PDF) for a comprehensive list of what is considered earned income.