Make Better Use of Your IRA Options
One of the most widespread misconceptions or overlooked opportunities in retirement planning concerns contributions to IRAs. Everyone who receives "earned income" or whose spouse filing jointly receives "earned income" (essentially pay for work performed) may contribute to a traditional IRA regardless of how much money they make or whether they contribute to a plan at work. The latter 2 factors will determine whether the IRA contribution will be tax-deductible, but not whether the contribution is allowed. So for those of you maxing out your plans at work, this may be another way to save for retirement in a tax-deferred manner.
Now whether it's beneficial for you and/or your spouse to contribute to a non-deductible traditional IRA rather than to save for retirement in a taxable account depends on a variety of circumstances. Everybody (regardless of income) is now able to convert their traditional and rollover IRAs to Roth IRAs, and this change to the tax code in recent years has tipped the balance more in favor of non-deductible IRA contributions.
Again, however, whether or not you should take advantage of the option to convert to a Roth will depend on your particular circumstances, but I will say that as a general rule I am a big fan of Roth IRAs. In essence, Roths avoid the minimum distribution requirements at age 70 1/2 of other IRAs, and add more certainty to retirement planning since you don't have to worry about the future tax rates on qualified withdrawals.
And if you start contributing to traditional IRAs now (even on a non-tax-deductible basis), you'll have that much more to convert to a Roth if and when the time is right for you. So in effect, even high-income taxpayers otherwise precluded from currently contributing to Roth IRAs can start adding this year to the amount that can eventually be converted.
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.