Give yourself a holiday gift with these 5 IRA moves before the end of 2019
It’s that time of the year when, along with buying gifts for loved ones, you must tend to financial matters, including one of your most important assets – your individual retirement account or IRA.
Odds are high that you have an IRA; an estimated 42.6 million U.S. households, or 33.4%, owned them as of mid-2018, according to the Investment Company Institute.
And odds may be just as high that you don’t pay much attention to it. If that’s the case, here are five things to consider before the end of 2019, because it's critical that you develop strategies for managing this nest egg.
What’s the tax liability in your IRA?
You might think you’re rich when you look at your IRA account statement. But the amount printed on your statement can be misleading. That’s because it's before taxes. That’s right – you’ll be paying taxes on distributions from your IRA, and that means you need to reduce the value of your IRA by your marginal tax bracket.
“A $1 million IRA is often only worth $500,000-$700,000 in one’s pocket after taxes are paid,” says Brian Vnak, a vice president with Wealth Enhancement Group.
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Are Roth IRA conversions beneficial?
Tax rates are – at least under current laws – low until 2026. And that means Roth IRA conversions make sense for many traditional IRA owners, says Vnak.
A Roth IRA conversion involves taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA, according to Fidelity Investments. And the amount converted is subject to taxes.
“The key is determining when and how much,” says Vnak. “This starts with long-term perspective, understanding one’s personal tax rates many years into the future, and then an annual review to finesse the sweet spot – how much to convert and when.
“Many converters are filling up the 22% or 24% tax brackets, but these brackets are filled with lots of landmines since reporting additional income can increase Medicare premium tiers, exposure to the 3.8% net investment income tax, and potentially converting capital gains taxation from 0% to 15% or even 20%,” says Vnak.
Walter Pardo, the CEO of Wealth Financial Partners, says a Roth IRA conversion can be especially helpful in years when your taxable income is low. “Knowing where you stand for the current year's taxes will help you make the best decision regarding the added tax,” he says.
Another factor to consider. Your age. Those account owners who don’t have to take an RMD – those between ages 59½ and 70½ – should evaluate whether a Roth IRA conversion makes sense, says Matt Curfman, the president of Richmond Brothers.
Make more productive RMDs
Most IRA owners don’t like their RMDs since they create taxable income and income that’s not needed to support one’s lifestyle, says Vnak.
Two options exist to get better bang for your tax buck: Qualified charitable distributions or QCDs and tax withholding.
“The QCD helps to avoid reporting the RMD as taxable income, thereby reducing the tax due and generating more wealth,” says Vnak.
And, having some or even all of an IRA distribution paid as federal and/or state withholding can provide flexibility to both satisfy the RMD while avoiding the need to pay estimated taxes throughout the year, he says.
Reduce your RMD
Purchasing a qualifying longevity annuity contract or QLAC in your IRA can help to reduce your RMD, says Pardo.
A QLAC is a special kind of longevity annuity that allows you to defer RMDs. The fair market value of your QLAC is excluded from your RMD calculation, says Pardo.
The QLAC limit – the maximum amount you can convert - is now $130,000, and QLAC distributions must begin no later than the first day of the month after you turn 85.
Did you inherit a Roth or traditional IRA?
If you inherited a Roth IRA or a traditional IRA you need to take a RMD before Dec. 31, says Pardo. The distribution from the Roth IRA might be a tax-free but the distribution from the traditional IRA will be taxable.
Robert Powell is the editor of TheStreet’s Retirement Daily www.retirement.thestreet.com and contributes regularly to USA TODAY. Got questions about money? Email Bob at rpowell@allthingsretirement.com.
This article originally appeared on USA TODAY: Retirement: Make these 5 IRA moves before the end of 2019
