Retirement EggsRecently we have received multiple inquiries regarding both contributions limits and withdrawal options from retirement accounts.

Therefore, I thought I’d create a handy reference guide for our clients and friends.  Because of the length of the information, please watch for all three parts of this blog.

PART ONE covers traditional and Roth IRA’s.  PART TWO includes 401(k)’s, 403(b)’s, SEPS (simplified Employee Pensions) and Simple IRA’s.  I’ll conclude the series with Inherited IRA’s.

I hope that you find this to be of value and, as always, welcome any questions or comments.

*** PART ONE ***

Traditional IRAs

Contributions: Anyone who earns income through work and isn’t yet age 70 1/2 can contribute.  But once you reach 70 1/2, you can no longer contribute, even if you’re still working.  Contributions are tax-deductible if you’re not covered by a retirement plan at work.  If you are, the amount you can deduct gradually phases out between modified adjusted incomes of $61,000 to $71,000 if you’re single or $98,000 to $118,000 if you’re married and file a joint return in 2016.

RMDs: You must take your first RMD by April 1 of the year after you turn 70 1/2.  But if you wait until then, you’ll have to take two distributions that year, one by April 1 and another by Dec. 31.  Every year thereafter, the RMD must be withdrawn by Dec. 31.  If you have multiple traditional IRAs (including SEP IRAs and SIMPLE IRAs), you must calculate an RMD for each, but the total amount can be withdrawn from just one account.

What does the IRS consider the day you turn 70 1/2?  It’s six calendar months after your 70th birthday.  For example, if your 70th birthday was on June 30, 2016, then you’d reach 70 1/2 on Dec. 30, 2016.  You must take your first RMD (for 2016) by April 1, 2017.  If your birthday was just one day later — on July 1, 2016 — you’d reach 70 1/2 on Jan. 1, 2017.  You wouldn’t need to take an RMD for 2016.

Roth IRAs

Contributions: There are no age restrictions on contributing to a Roth IRA, but the amount you can contribute gradually decreases from a maximum of $5,500 ($6,500 if you’re 50 or older) once you reach a modified adjusted gross income of $117,000 for singles and $184,000 if married filing jointly; it hits zero at modified adjusted gross incomes of $132,000 for singles and $194,000 for married folks filing joint tax returns in 2016.

RMDs: None!  You can leave the money in the account forever or until you die, whichever comes first.

Inherited Accounts

Contributions: Generally, you can’t contribute to an account you inherit.  The exception is an account owned by the spouse of the deceased, if that spouse retitles the account in her or his own name.

RMDs: The rules can get complicated, depending on whether you were the spouse of the deceased and whether the deceased was in the process of taking required minimum distributions before he or she died.  But generally, beneficiaries of inherited retirement accounts have three options:

  1. Transfer the assets to their own IRA: This option is only available to the spouse of the deceased. Once the assets are in the spouse’s account, RMDs and early withdrawal penalties (if any) will be determined by the spouse’s age.
  2. Empty the account within five years: No withdrawals are required in any given year as long as all the assets are distributed within five years of the benefactor’s death.  The distributions will be exempt from the 10% early withdrawal penalty normally applied to distributions made before age 59 1/2.
  3. Stretch the account over the beneficiary’s lifetime: Take RMDs each and every year, starting the year after the benefactor’s death.  While this option would require the beneficiary to begin taking money sooner than the five-year option, the rest of the account can be left to grow for decades.  But it does mean that any beneficiary, of any age, must take an annual RMD.  Even a 1-year-old baby who inherited an IRA from her grandmother would need to take a required distribution each year the account has money in it.  This would be the case even if it’s a Roth IRA.  Fortunately, these RMDs are also exempt from the 10% early withdrawal penalty.

Note that the third option is available only to named beneficiaries of an account.  If the account didn’t have named beneficiaries, or they had already passed away, the account then goes into the overall estate. Anyone who then inherits the account must liquidate it within five years, which could result in a large tax bill and the loss of future tax-advantaged growth; the option to “stretch” the account over a beneficiary’s life has been lost.  This is why it’s important to name specific people as the primary and backup beneficiaries of your retirement accounts, and to keep that information updated.

Contact us for a complementary conversation regarding your retirement goals and objectives.

Barbara A. Culver
CFP®, ChFC®, CLU, AEP®
Resonate, Inc.
(513) 605-2500
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