IRA Assessment

February 21, 2018

Learn more about IRAs and how best to manage yours.

The IRA was born in 1974, in the Employee Retirement Income Security Act (ERISA). Employers already received tax deductions for setting aside money for the retirement of their employees. The idea was to extend that privilege to workers themselves, if they weren’t covered already by an employer plan. IRA eligibility was expanded to all Americans with earned income in 1981, but the IRA deduction was later taken away from higher-income taxpayers. In 1997 the Roth IRA variation was introduced. There’s no upfront tax deduction, but if conditions are met all of the distributions from the Roth IRA are tax free. Finally, a number of simpler employer retirement plans have been built upon the IRA foundation.

Tax diversification

The tax deduction for the traditional IRA contribution is welcome. It makes funding the IRA easier, especially when times are tight. But eventually the music has to be faced, and taxes must be paid.

The alternative is to have some money in Roth IRAs, where the income tax has been prepaid. This can create greater flexibility and control of the tax effects of a retirement income stream. Also Roth IRAs are exempt from required minimum distributions during the owner’s life.

Multiple minor accounts

Have you set up several IRAs over the years at different financial institutions? Are you swamped by statements for the many accounts?

Consolidation of your IRAs in a single account will simplify your financial life. You’ll have just one statement to contend with, and one account to review for investment decisions. Maintenance fees may be reduced as well.

The consolidation process need not be complicated. We’ll be happy to help if you wish to take this step.

Investment incoherence

Your IRA investments should be reviewed in the context of all your investments, including 401(k) accounts and taxable savings. You want to have one asset allocation plan for all of your holdings, not a separate plan for every account. Having multiple accounts does not provide you with investment diversification if all the accounts are invested in the same way.

If you are unsure of the best investments for your IRA, seek professional guidance. Doing nothing, taking the IRA investments for granted, is not a good solution.

Check your beneficiary designations

Have circumstances changed since you specified a surviving beneficiary for your IRAs? Has there been a death, a birth, a marriage or a divorce? You might be surprised at how often IRA designations are overlooked during a divorce.

A substantial increase in wealth also may be an occasion for changing an IRA designation. For example, if a surviving spouse no longer will need the IRA for retirement security, it may make sense to tap the IRA for charitable bequests. Such a move may save on estate taxes, inheritance taxes, and income taxes after death.

The IRA designation needs to be reviewed in the context of the overall estate plan. IRAs may be subjected to estate and inheritance taxes, and distributions from inherited IRAs (but not inherited Roth IRAs) may be subject to income taxes as well. All these taxes can eat up this asset pretty quickly, so thoughtful planning is a must. It may be appropriate, for example, to shift the burden of tax payments to the residue of the estate, instead of invading the IRA to make the payments.

© 2018 M.A. Co. All rights reserved.

Legal, Investment and Tax Notice: This information is not intended to be and should not be treated as legal advice or tax advice. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.