What Your Clients Should Know About IRAs

IRAs are a critical component of a long-term savings plan. It’s important that your clients understand the basics of these types of accounts, including when they can and cannot make contributions, so they can make the most of them. Here’s what you—and your clients—should know about IRAs.

Contributions to a traditional IRA are tax-deferred

Traditional IRAs may be funded with pre-tax dollars. Distributions, except the return of non-deductible contributions, however, are subject to ordinary income tax rates. Because of this, consider putting the fixed income type investments of the overall portfolio in IRAs. Keep in mind that required minimum distributions (RMDs) start at age 72 (if the individual turned 70.5 years old in 2020 or later).

Roth IRAs offer true tax-free growth

Individuals must use after-tax dollars to fund a Roth IRA. Contrary to a traditional IRA, all distributions (subject to a five-year holding period that starts when the Roth IRA is initially funded) are tax-free. Although Roth IRAs do not have RMDs, remember that Roth 401k accounts do.

Requirements for contributing to an IRA or Roth IRA

To contribute to an IRA or Roth IRA, an individual must have earned income. Generally, this would be wages or self-employment income. While there isn’t an age limit, the ability to contribute does have income limitations—it’s important for individuals to discuss their eligibility with a tax advisor.

IRA and Roth IRA contributions must be made by April 15 of the following tax year—the IRS does not allow extensions. For example, individuals have until April 15, 2023, to make a contribution for 2022. Contributions in 2022 are limited to $6,000 for individuals under age 50 and $7,000 for individuals age 50 and older.

Tax factors to consider for Roth conversations

If a client is considering a Roth conversion, it’s important to steer them in the right direction. If they think tax rates will increase or they will be in a higher tax bracket, they may want to consider a Roth conversion. On the other hand, if they expect to be in the same or lower tax bracket (e.g., they’re retiring), the general recommendation is to not do a Roth conversion.

IRAs are an important part of your client’s estate plan

If your client wants to benefit a charity, consider gifting an IRA; the charity will never pay tax on the distributions. However, if a client wishes to gift their estate to family members, they may want to consider a Roth conversion. A Roth IRA is a great asset to receive, as it grows tax-free for 10 years after the original owner’s death.

Bring an expert to the table

Understanding the basics of IRAs allows your clients to maximize their tax benefits. At Elevate, we serve as your in-house tax advisor to support you in discussing IRAs with your clients and can even step in to directly advise clients as needed. By giving you access to IRA and tax expertise, we can help you add value across your client relationships. To learn more about how we can support you, contact us today.