Conduct a Year-End IRA Review


Form 1040 for US Individual Income Tax ReturnYou schedule regular checkups with your doctor to monitor your physical health, so why not schedule a year-end checkup to monitor your financial health?

Each year, you should review IRAs with your tax advisor to make sure your retirement plan stays on track. Here are some things to keep in mind. 

Don't miss required minimum distributions (RMDs).

Traditional IRA owners must generally start receiving RMDs from their IRAs by April 1 of the year following the year they reach age 70½. This is known as the required beginning date. Roth IRAs do not require minimum distributions. Missing an RMD can result in a 50% IRS penalty tax on the amount of money you should have withdrawn, but did not.

Taxes due? Your IRA can help.

You may be able to use your IRAs to help cover tax payment shortfalls. if you haven't paid enough income tax to the IRS. For example, if you're already taking withdrawals from your IRA, you can have additional withholding tax taken from these withdrawals to cover the amount you owe the IRS — avoiding the underpayment penalty tax you otherwise might owe.

Consider a Roth IRA conversion.

When compared with a Traditional IRA, the Roth IRA offers the ability to withdraw earnings completely federal income tax-free, provided the IRA has been in place for at least five years and the withdrawal meets at least one of these qualifying events:

  • The withdrawal is made after you reach age 59½
  • You become disabled
  • The distribution goes to the beneficiary of your estate after your death
  • You use the withdrawal to pay for a first home (up to $10,000)

Under age 59½ and considering a Roth IRA conversion?

Think about converting this year to get started on reaching the five-year holding period necessary to qualify for federal tax-free withdrawals.

If a Roth IRA withdrawal doesn't meet these requirements, the withdrawn earnings are subject to ordinary income taxes and, if applicable, an IRS 10% early withdrawal penalty tax. Note: There is a separate five-year rule for conversions if you are under age 59½. The rule states that if you are younger than 59½, you must hold the converted funds for five years. Distributions of converted funds not held for five years will be subject to the 10% penalty if the funds are withdrawn before you reach age 59½. This five-year holding period starts over with each new conversion.

Roth IRAs provide another advantage — unlike Traditional IRAs, Roth IRAs do not have RMDs. Because of these advantages, many people decide to convert funds they have in a Traditional IRA to a Roth IRA (keep in mind this is a taxable event in the tax year the Traditional IRA is converted to a Roth).

Keep an eye on the five-year IRA conversion "clock."

If you're under age 59½ and determine you could benefit from a Roth IRA conversion, think about converting this year to get started on reaching the five-year holding period necessary to qualify for federal tax-free withdrawals. The countdown to this five-year "clock" begins on the first day of the first tax year in which you open and fund a Roth IRA. For example, if you made a 2014 contribution to your IRA by April 15, 2015, your five-year clock will begin January 1, 2014. You'll still need to meet at least one of the qualifying events mentioned in the bullet points above to qualify for federal tax-free withdrawals, but it may be a good idea to get the five-year clock ticking as soon as you can.

Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity and may lose value.

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