Wealth Management & Financial Planning

Wealth Management & Financial Planning

Understanding the Changes Affecting IRA Accounts

December 20, 2018 changed the thought process around IRA’s as strategic planning tools. Sadly, I’m hearing a lot of commentary about IRA rules that is confusing and sometimes dead wrong. The Roth remains one of the most powerful strategies for helping families navigate their retirement journey.

Two issues factor into today’s confusion about IRA’s. The first issue relates to the annual contributions that may be made regardless of age, provided an individual has earned income (but not too much earned income.) The second issue relates to the conversion option. This option allowed account holders to reallocate money from an existing IRA account into a Roth IRA. The conversion could be made at any age and regardless of how much income the account holder earned. Neither of those things has changed!

What was eliminated was the ability to re-characterize a previous Roth conversion. This option essentially permitted a “do-over” if you changed your mind because the account’s value declined or some change reduced your taxes. It was the biggest “no brainer” for people who met appropriate criteria. Unfortunately, this window of opportunity was previously overlooked by many families. The re-characterization option is lost starting in 2018. However, you can still do a re-characterization for conversions made in 2017.

The “back door Roth” still exists and should be considered by many families. As always, consult your financial professionals before attempting this process. There are a few tax codes – including the pro-rata rule – that are accidentally overlooked. The IRS might empathize, but a lack of knowledge won’t save you on interest and penalties! Re-characterizing an IRA allows you to put money in a non-deductible IRA and later convert those funds to a Roth IRA. Again, please consult with a tax professional.

One planning strategy we love to discuss is using your kids’ and living parents’ tax returns. If you have available resources and are in a higher income tax bracket, this strategy could help fund the taxation and allow other generations to convert their IRA’s to Roth IRA’s.

Most parents of Baby Boomers are in lower tax brackets than their kids. Boomers can make a gift to our parents to help pay the taxes on their IRA’s. With this strategy, the inherited funds will be tax-free to us and our beneficiaries. This is a beautiful strategy to conduct strategic planning while potentially making a significant long term difference to your financial future.

Often younger children change employers and rollover a small 401k into an IRA. The children may not have the funds to do a Roth conversion.  But again, parents can make a gift. This is one charitable planning strategy that helps donors’ charities receive more tax-free money. The charities receive taxable dollars that are never taxed! Assuming your kids have earned income, they can contribute your gifted funds to their Roth IRA’s. The Roth hasn’t changed but some of the rules have. Don’t overlook one of the greatest planning tools available.

Tax advice provided by CPA’s affiliated with Financial Enhancement Group, LLC.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

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