One of the most important features of your individual retirement account (IRA) is that it is an “individual” account. You can customize your deposits and take withdrawals when you want to, and you are responsible for paying taxes on distributions. You can even control what happens to it after you die.
If you want to take advantage of all that your IRA has to offer, read on for some little-known features that will help you get the most out of your contributions.
- You can have multiple traditional and Roth IRAs, but your total cash contributions can’t exceed the annual maximum, and your investment options may be limited by the IRS.
- IRA losses may be tax-deductible.
- Required minimum distributions (RMDs) must be taken from traditional IRAs once you turn 72, but you can choose which account(s) to take them from.
- Anyone who has earned income can contribute to a traditional IRA, regardless of age.
- There is also no age limit for contributing to a Roth IRA.
1. It’s OK to Have More Than One IRA
It is possible to end up with more than one IRA for a number of reasons. Here are some examples:
- You had an existing Roth IRA and then rolled an old 401(k) into a traditional IRA.
- Your adjusted gross income (AGI) rose to the point where you were no longer eligible to contribute to your Roth IRA, so you opened a traditional IRA.
- You inherited an IRA, and you already had one of your own.
- You maintained your Roth IRA and opened a traditional IRA to take advantage of tax deductions.
You can contribute to as many IRAs as you want, but the total you can deposit in all IRAs is limited to the annual maximum. The annual maximum contribution for 2020 and 2021 is $6,000, or $7,000 if you are age 50 or older (contribution limits for 2020 remain the same). So, if Bob, age 42, deposits $2,000 into his traditional IRA, he can contribute no more than $4,000 to his Roth account during the same year.
2. Contributions to Regular IRAs Must Be in Cash
When making your regular contribution to your IRA for the year, it must be done in cash. This limitation does not apply to the distribution of securities that are rolled over, as these must generally be rolled over in kind.
3. Losses May Be Tax-Deductible
One of the main advantages of an IRA account is the ability to defer taxes on gains and investment income. You can’t use losses inside the IRA to offset gains, but if you distribute the total balance from your traditional IRA and the amount is less than your basis in the account, you can deduct that loss.
More specifically, the Internal Revenue Service (IRS) allows you to deduct losses on a traditional IRA but with some caveats. Suppose you have completely withdrawn all funds from all of your traditional, SEP, and SIMPLE IRAs during the year, and the total amount of basis is less than the total amount distributed. After you have combined the loss with other miscellaneous deductions, you can only deduct the amount that exceeds 2% of your AGI.
“The same rule applies for Roth IRAs,” says Curt Sheldon, CFP®, EA, AIF®, president and lead planner, C.L. Sheldon & Company, LLC, Alexandria, Va. “Once all Roth IRAs are emptied—all funds distributed—you can deduct losses up to the dollar amount of your contributions (basis).”
4. You Don’t Have to Take RMDs from All of Your IRAs
Owners of traditional IRAs must begin taking required minimum distributions (RMDs) by April 1 of the year after they turn 72 years old. The minimum amount distributed is based on the balance of the account on December 31 of the previous year and the owner’s life expectancy. For each year thereafter, the RMD must be withdrawn.
If you have multiple traditional IRAs, you don’t have to take RMDs from all of them. You can combine the total RMD amounts for each of your IRAs and take the total from one IRA or a combination of IRAs. You may prefer, for example, to liquidate the investments in one IRA over the investments in another.
A spousal beneficiary can claim an inherited IRA as his or her own and make new contributions to the account and control distributions.
5. Different Rules Govern Spousal and Non-Spousal Beneficiaries
One of the benefits of owning an IRA is the ability to transfer funds directly to beneficiaries without going through probate. Spousal beneficiaries can claim inherited IRAs as their own—a flexibility that allows a spouse to make new contributions to the inherited IRA and control distributions.
“A spouse has lots of options when they inherit an IRA,” says Jillian Nel, CFP®, CDFA, director of financial planning at Inscription Capital LLC, Houston, Texas. “They can make it their own IRA or a beneficiary-designated IRA. The latter would occur if the spouse is under age 59½ and needs to take out money for whatever reason. A beneficiary account would avoid the 10% penalty owed on IRA distributions to owners who are under age 59½.”
Non-spousal beneficiaries cannot treat inherited IRAs as their own. They can’t add to them, and they must completely liquidate the account within five years of the death of the owner or distribute the amounts over their life expectancies. Generally, the distribution options available depend on the age at which the IRA owner dies. Keep this in mind if you plan to leave IRA assets to your children or grandchildren.
6. You Can Transfer or Roll Over Your IRA
It is common for individuals to move accounts from one financial institution to another. If you decide to maintain the same type of IRA account with a different company, you can move the assets as a transfer or as a rollover.
With a transfer, the assets are delivered directly from one financial institution to the other, and the transactions are not reported to the IRS. “When moving funds in your IRA, you may do a direct transfer from one financial institution to another any number of times a year. Be aware that each firm may have its own account setup and close-out fees as well as an annual fee, so be aware of these charges when making firm changes,” says Rebecca Dawson, a financial advisor in Los Angeles, Calif.
A rollover involves taking a distribution of the assets to yourself and rolling over the amount within 60 days. “When a group retirement plan such as a 401(k) is rolled into an IRA, if the rollover is done the correct way, it can preserve some of the 401(k) plan benefits. This is why it can make sense to roll the 401(k) into a rollover IRA rather than a contributory IRA,” says Kirk Chisholm, principal at Innovative Advisory Group in Lexington, Mass.
You may also be able to go in the other direction and roll over your IRA assets to a 401(k) plan. However, the plan must allow it and would determine whether the rollover can be done as a 60-day rollover or if the funds must be paid directly to the plan. One reason to do this: to shelter those IRA assets from RMDs. Funds in the 401(k) where you currently work aren't subject to RMDs when you turn age 72, but money in a traditional IRA will be. Don't pay taxes on the money if you don't need to withdraw it for living expenses. Check with a tax advisor to make sure you've done the transfer in time according to IRS regulations.
If you're still working as you approach 72, shelter money in your traditional IRAs from required minimum distributions by transferring those funds to your 401(k) at that employer if it's permitted by your plan.
7. Your IRA Can Be an Annuity
Your annuity can operate under the same rules as an IRA if the funding vehicle is an individual retirement annuity. One benefit is that annuity policies were designed to provide retirement income for life.
8. IRAs Can Be Managed Accounts
Brokerage accounts allow you to give your financial advisor written authorization to make investment decisions and routine transactions without notifying you first. A flat fee is often charged for managing the account. This type of activity is allowed for IRAs, provided your broker has an agreement with you to allow such actions.
“I’m a real advocate for professional management of large IRA accounts. A quality investment advisor can build a low-cost custom portfolio and monitor it for necessary changes," says Dan Danford, CFP®, founder and chief executive officer at the Family Investment Center in St. Joseph, Mo. "They can draw upon thousands of proven investment options and adjust for changes in your situation, product innovations, or changes in the economy."
"As a professional," Danford adds, "I worry when retirees have a large portfolio and seek to save money by going it alone. I’ve seen bad results too many times. For most people, it’s penny-wise and pound-foolish.”
9. Investment Options May Be Limited
The IRS limits which investment types can be held in an IRA, but your financial institution may have additional asset restrictions. The IRS allows some gold and silver coins, for example, but most financial institutions will not. Similarly, some mutual fund companies do not allow individual stocks to be held in their IRAs.
10. Age Is Just a Number, Mostly
Anyone of any age who is paid a salary, tips, or hourly wages for their work (earned income) can contribute to a traditional IRA, including minors. This means your children can start saving for retirement as soon as they get their first job. An IRA is an excellent option for kids who earn more than they intend to spend because it allows long-term tax-deferred savings.
“When you start investing outweighs how much you invest,” says Michelle Buonincontri, CFP®, CDFA™, a financial coach based in Phoenix, Ariz. “If you have earned income, starting an IRA as a teenager, preferably a Roth IRA, is an excellent idea. It can have a significant impact on your retirement savings by harnessing the power of compounding interest.”
The tax penalty for early distributions will encourage your kids to defer taking distributions from the IRA while offering them the ability to use funds for college or up to $10,000 toward buying their first home without penalty. It also teaches your children the value of investing at an early age.
Senior citizens can continue to contribute to Roth IRA accounts as long as they have earned income. This is an excellent account for money that will eventually pass as an inheritance. Previously, seniors couldn't make IRA contributions to traditional IRAs after the age of 70½, but following the passage of the 2019 SECURE Act, contributions can now be made at any age as long as the individual has earned income. There are no longer age limits to making contributions to traditional IRAs.
The Bottom Line
IRAs have built-in flexibility. Understanding how the various features work can help you tailor your retirement savings to meet your needs. If you are looking for more information on where to start, research the best brokers for IRAs.