Wednesday, August 15, 2018


In his classic Broadway musical comedy A FUNNY THING HAPPENED ON THE WAY TO THE FORUM. Steve Sondheim tells us that “Everybody Ought to Have a Maid”.  I agree.

I also believe that everybody ought to have an IRA.

Everybody with earned income, regardless of age, level of income or wealth or coverage under an employer plan, should have an IRA as a form of secured savings.  This is because of the multiple benefits of an IRA account – the tax deferred, or tax free, accumulation of income, the possible tax deduction it can provide, and the fact that IRAs are, in most cases, protected from general creditors to whom you may owe outstanding debts and during bankruptcy procedures. 

You should, of course, first take as much advantage as possible within your budget of your employer’s 401(k), 403(b), 457, or whatever retirement plan, hopefully to the maximum annual allowable contribution. 

There are two types of IRAs – the “traditional” IRA and the ROTH IRA.  If you can have a ROTH IRA you should have a ROTH IRA and use it as your current savings account.

The maximum amount you can contribute to a ROTH IRA, a traditional IRA or a combination of ROTH and traditional accounts for 2018 is $5,500.   If you are age 50 or older you can contribute an additional $1,000.  A non-working spouse can open and contribute to an IRA, up to the maximum, as long as the other spouse has earned income. The combined contributions of working and non-working spouses are limited to the working spouse’s earned income.

Contributions to a ROTH IRA are never deductible on your federal or state income tax returns.  But earnings on money held in a ROTH IRA account can eventually be totally tax free to both you and your beneficiaries.

Here is what you need to know about a ROTH IRA -

* You can contribute to a Roth IRA at any age as long as you have earned income from a job or self-employment.   You do not have to stop making contributions at age 70½ if you still have earned income.

* The amount of your allowable contribution to a ROTH IRA is phased out and eventually eliminated based on your Adjusted Gross Income (AGI).  The AGI phase-out range for taxpayers making contributions to a ROTH IRA for 2018 is -

$120,000 - $135,000 = Single and Head of Household
$189,000 - $199,000 = Married Filing Joint and Qualifying Widow(er)
$0 - $10,000 = Married Filing Separate

* You can withdraw your contributions at any time without taxes or penalty.  All withdrawals are considered to come from contributions first.

* You must hold the Roth account for at least five years and be at least 59½ before you can withdraw earnings tax-free and penalty-free.  The 5-year period begins on the first day you make your first ROTH contribution.

* You never have to take any withdrawals from a ROTH IRA in your lifetime.  There are no annual required minimum distributions beginning at age 70½.

As long as you never touch the accumulated earnings on your ROTH IRA investment, and withdraw only your contributions, you can take money from this account at any time over the years without any tax cost.  And your accumulated earnings will grow to a nice retirement nest egg, or legacy for your beneficiaries, if invested wisely.

You have contributed $10,000 to a ROTH IRA, which has accumulated earnings of $2,000.  You need $5,000, or as much as $10,000, to pay for an extraordinary medical bill, or for needed home repairs, or to pay for your child’s college education.  You can take the $5,000 - $10,000 from your ROTH IRA account without any tax consequences.

Contributions to a “traditional” IRA may provide a current tax deduction.  If all of your traditional IRA contributions have been fully deductible then all subsequent withdrawals are fully taxable[R1] .  The amount you can deduct may be phased-out based on your “Modified” Adjusted Gross Income (MAGI) if you are an active participant in an employer-sponsored retirement plan such as a 401(k), a 403(b) or an SEP.    

Your “Modified” AGI for purposes of the deduction phase-out begins with “regular” AGI and adds back the-

• foreign income and housing exclusions and deduction,
• savings bond interest exclusion for higher education costs,
• adoption assistance benefits exclusion, and
• deduction for student loan interest.

For 2018, the amount of a contribution to a traditional IRA that can be claimed as a deduction on the tax return of a taxpayer who is an active participant in an employer retirement plan is phased out if Adjusted Gross Income (AGI) is -

• $ 63,000 - $73,000 for Single and Head of Household
• $101,000 - $121,000 for Married Filing Joint and Qualifying Widow(er)
• $0 - $10,000 for Married Filing Separate

The deduction on a joint return for a spouse that is not an active participant in an employer plan, but who is married to one who is, phases out at AGI of $189,000 to $199,000.  

If your deduction is limited or totally phased out you can still contribute the maximum amount to an IRA account.  Part of the contribution will be “non-deductible”.  Non-deductible contributions create a “basis” in your IRA investments and part of your future withdrawals will be partially tax free as a “return of basis”.

You can also use IRAs to save for education, as well as excessive medical expenses and buying a home.  Exclusions to the premature withdrawal penalty exist for these types of expenses.

As far as reporting the activity within an IRA account – as I explained in a 2009 post – "What Happens In An IRA Stays In The IRA".   

Younger employees just starting out should definitely opt for the ROTH IRA.  Here are two suggestions for funding IRA contributions if you are starting your first full-time job –

(1) If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your contribution. 

(2) Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Beginning with the first week of January put $10, $20, or $50 in this “bank” each week.  On January 2nd of the following year take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for that tax year.  Continue this practice for subsequent years.

Here is another good idea – If your son or daughter has a summer or after-school job you should consider opening up a ROTH IRA account for him or her.  Money you give your child for doing chores around the house doesn’t count, but earnings from babysitting or mowing lawns may qualify.

You can contribute 100% of your child’s earnings to the account, up to the $5,500 maximum. If your son earns $2,400 for the summer you can contribute $2,400 to a ROTH IRA for him. If he earns $6,000 you can contribute $5,500.

There is nothing in the Tax Code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.  You can use your own money to fund the IRA contribution and let your child keep his earnings.

You can use a ROTH IRA to encourage your children to work or to save. If your son earns $5,000 in a part-time job, open a ROTH IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a ROTH, match it and put in another $2,500 (assuming her total earnings for the year is at least $5,000).

If you put the maximum into a ROTH each year for your 16-year-old from 2018 through 2023, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.  One caveat - there exists a potential problem with opening an IRA account for a child. Once the child reaches the “age of majority,” usually 18, he or she will have full access to all the funds and can “take the money and run.”

One last thing - the earlier in the year you contribute to your, or your children's, ROTH IRA, the more money you will accumulate tax-free at retirement.  So, if not already done, make your 2018 ROTH IRA contribution today, and make your 2019 contribution on January 2nd of 2019.

If you have questions about the Act will affect your specific situation I suggest you consult your, or a, tax professional.  You can begin your search for a tax professional at "Find A Tax Professional".


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