Tax time: Schedule a client talk on IRAs

Tax time: Schedule a client talk on IRAs

With the April 15 deadline approaching for making a 2013 tax year contribution to an individual retirement account, it is a good time to talk about tax strategy. And with varying types of IRAs available, clients of all income levels may benefit.

Higher-income clients who may not be eligible to contribute to a Traditional or a Roth IRA may want to contribute to non-deductible IRA, and then convert it to a Roth IRA later. A non-deductible IRA is funded with after-tax dollars and does not offer tax-free withdrawals. Instead, taxes are deferred to retirement. The Roth IRA offers tax-free withdrawals in retirement. Using this strategy, the funds are not taxed when the account is converted to a Roth.*

Interested clients may include higher-income clients seeking a source of tax-free income in retirement, and those who may not have access to a Roth IRA through their employer-sponsored retirement plan.

Another goal of an IRA checkup with clients is to review the advantages of consolidating accounts so they are all held under one IRA. Many workers hold multiple jobs during the course of their careers, and clients may have several IRAs held at different institutions. In fact the Department of Labor estimated that those born between 1957 and 1964 held 11.3 jobs between age 18 and 46.

As some rules have changed in recent years, particularly around the Roth IRA, it is important to review strategies with clients to ensure they know how they can benefit from the different types of accounts and how their income level affects contribution limits.

* For taxpayers with other (pretax) IRAs they are not converting, the tax calculation is more complex due to the “aggregation rule.” For more information on calculating taxes on a Roth IRA conversion when the taxpayer holds a combination of after-tax and pretax IRA funds refer to the example in “Converting a Traditional IRA to a Roth IRA.”


More in: Retirement/Income, Taxes