Axley & Rode, LLP

The coronavirus (COVID-19) pandemic has caused the value of some retirement accounts to decrease because of the stock market downturn. But if you have a traditional IRA, this downturn may provide a valuable opportunity: It may allow you to convert your traditional IRA to a Roth IRA at a lower tax cost. Here’s what makes a traditional IRA different from a Roth IRA Traditional IRA. Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax deferred. On the downside, you generally must pay income tax on withdrawals. In addition, you’ll face a penalty if you withdraw funds before age 59½ — unless you qualify for a handful of exceptions — and you’ll face an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 72. Roth IRA. Roth IRA contributions are never deductible. But wit...

If you’re getting ready to file your 2019 tax return, and your tax bill is higher than you’d like, there may still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the Wednesday, April 15, 2020, filing date and benefit from the resulting tax savings on your 2019 return. Do you qualify? You can make a deductible contribution to a traditional IRA if: You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or You (or your spouse) are an active participant in an employer plan, and your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status. For 2019, if you’re a joint tax return filer covered by an employer plan, your deductible IRA contribution phases out over $103,000 to $123,000 of modified AGI. If you’re single or a head of household, the phaseout range is $64,000 to $74,000 for 2019. For married filing separately, the...

If you’re age 70 ½ or older, be aware that a new law has changed the rules for IRAs. Before 2020, traditional IRA contributions weren’t allowed once you attained age 70 ½. Starting in 2020, new rules allow individuals of any age to make contributions to traditional IRAs, as long as you have compensation (generally, earned income from wages or self-employment). The required minimum distribution (RMD) age has also been raised from 70 ½ to 72. Before 2020, IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70 ½. Contact us with questions.

Generally, amounts withdrawn from an individual retirement account before age 59-1/2 are subject to an additional 10% tax, unless an exception applies (such as a distribution in a case of financial hardship). With the recent passage of the Setting Every Community Up for Retirement Enhancement Act (SECURE) a new exception has been added. Starting in 2020, a plan distribution up to $5,000 may be penalty-free, if it’s used to pay costs related to a birth or adoption. The limit applies on an individual basis, so for a married couple, each spouse may qualify for a penalty-free $5,000 distribution. Contact us with questions to learn more about this and other changes brought by the SECURE Act.

If you save for retirement with an IRA or other plan, you’ll be interested to know that Congress recently passed a law that makes significant modifications to these accounts. The SECURE Act, which was signed into law on December 20, 2019, made these four changes. Change #1: The maximum age for making traditional IRA contributions is repealed Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. Starting in 2020, an individual of any age can make contributions to a traditional IRA, as long he or she has compensation, which generally means earned income from wages or self-employment. Change #2: The required minimum distribution (RMD) age was raised from 70½ to 72 Before 2020, retirement plan participants and IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the early 1960s and, until recently, hadn’t been adjusted to account fo...

Converting a traditional IRA to a Roth IRA can provide tax-free growth and tax-free withdrawals in retirement. But what if you convert your traditional IRA — subject to income taxes on all earnings and deductible contributions — and then discover you would have been better off if you hadn’t converted it? Before the Tax Cuts and Jobs Act (TCJA), you could undo a Roth IRA conversion using a “recharacterization.” Effective with 2018 conversions, the TCJA prohibits recharacterizations — permanently. But if you executed a conversion in 2017, you may still be able to undo it. Reasons to recharacterize Generally, if you converted to a Roth IRA in 2017, you have until October 15, 2018, to undo it and avoid the tax hit. Here are some reasons you might want to recharacterize a 2017 Roth IRA conversion: The conversion combined with your other income pushed you into a higher tax bracket in 2017. Your marginal income tax rate will be lower in 2018 than it was in 2017. The value of your account has ...