FORUM Private Client Group

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Basic Retirement Planning

 

Traditional IRAs

Definition

A traditional individual retirement account or individual retirement annuity (IRA) is a personal savings plan that offers tax benefits to encourage retirement savings. You can contribute up to the lesser of $6,000 in 2020 (unchanged from 2019), or 100% of your taxable compensation to a traditional IRA. In addition, individuals age 50 and older can make an extra "catch-up" contribution of $1,000 in 2019 and 2020. Funds in a traditional IRA grow tax deferred until they are withdrawn. Contributions may be fully or partially tax deductible, depending on certain factors.

Prerequisites

  • You have taxable compensation (i.e., wages, self-employment income) during the year
  • You can deduct the full amount of your contribution provided that you are not covered by an employer-sponsored retirement plan
  • If you are covered by an employer-sponsored retirement plan, your IRA deduction (if any) depends on your modified adjusted gross income (MAGI) and your federal income tax filing status. You will be entitled to a partial deduction in 2020 if your MAGI is less than:
    1. $75,000 if your filing status is single or head of household (less than or equal to $65,000 for a full deduction)
    2. $124,000 if your filing status is married filing jointly (less than or equal to $104,000 for a full deduction)
    3. $10,000 if your filing status is married filing separately (full deduction not available)

Note: These income ranges are for the 2020 tax year, and are indexed for inflation.

  • If you're not covered by an employer plan, but your spouse is, your deduction is limited in 2020 if your MAGI is $196,000 to $206,000, and eliminated if your MAGI exceeds $206,000.

Key strengths

  • Deductible contributions are made on a pre-tax basis
  • Funds in traditional IRAs grow tax deferred until they are withdrawn
  • IRAs offer a wide range of investment choices
  • $1,362,800 of IRA assets may be protected in the event of bankruptcy under federal law [SEP IRAs, SIMPLE IRAs, and amounts rolled over to an IRA from an employer qualified plan or 403(b) plan, plus any earnings on the rollover, aren't subject to this dollar cap and are fully protected under federal law if you declare bankruptcy]1

Key tradeoffs

  • Your ability to deduct contributions may be reduced or eliminated if you are covered by an employer-sponsored retirement plan
  • Funds you withdraw from a traditional IRA are taxable income in the year received (to the extent that the withdrawal consists of deductible contributions and investment earnings)
  • Withdrawals taken before age 59½ may be subject to a 10% premature distribution tax (subject to certain exceptions, including up to $100,000 in 2020 for coronavirus-related distributions)
  • Minimum annual withdrawals are required after you reach age 72 (required minimum distributions)2
  • Taxable portion of distributions will be taxed at ordinary income rates even if funds represent long-term capital gains or dividends paid on stock held within the IRA

Variations from state to state

  • States vary in their protection of IRAs from creditors
  • States differ in their tax treatment of IRAs

How is it implemented?

  • Open an IRA with a bank, financial institution, mutual fund company, life insurance company, or stockbroker
  • Select types of investments to fund the IRA (e.g., CDs, mutual funds, annuities)
  • Make contributions up to the due date of your federal income tax return for that year (usually April 15 of the following year), not including extensions
1This amount is scheduled to be adjusted for inflation in April 2022.
2RMDs have been waived in 2020 due to the CARES Act.


IMPORTANT DISCLOSURES Broadridge Investor Communications, Solutions, Inc. and FORUM Private Client Group are separate and unaffiliated entities. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

This communication is strictly intended for individuals residing in the state(s) of AL, AZ, CA, FL, IL, IN, MI, SC, TN and TX. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.