Individual Retirement Accounts

The Individual Retirement Account (IRA) was introduced in 1974 with the passage of the Employee Retirement Income Security Act (ERISA). According to the Investment Company Institute, IRA investment to date is well in excess of $3 trillion (representing approximately one-fourth of all retirement assets in the United States). In 1997, Congress created the Roth IRA for individuals of earned incomes below certain threshold amounts.

In this article, we explore the traditional IRA and the Roth IRA, including the benefits and limitations of each, along with a discussion about the possible utility of converting a traditional IRA to a Roth IRA. Additionally, this article discusses the possible selection criteria of advisers for IRAs. Lastly, this article issues a caveat to investors about IRA beneficiary designations and the possible tax consequences of same.

What is a traditional IRA?
A traditional IRA permits investors to make limited annual contributions that are tax deductible from ordinary income with some limitations, such as individuals covered by an employer plan. For those individuals age 50 and older an additional annual catch-up contribution is permitted.

All contributions to a traditional IRA must be made by the tax-filing deadline of April 15 (or other date set by the IRS) of the following year. As with any investment, it is better to make the contributions early to enjoy the compounding of the investment.

Can I roll over my 401(k) or other employer-sponsored plan to a traditional IRA?
Generally, yes. It is usually preferable to rollover these retirement plans due to greater flexibility and control, especially if the funds are to be managed by professional, fee-only fiduciary investment advisers. Additionally, a rollover of retirement plans is often beneficial for estate and tax planning.

At what age may I begin withdrawing money from my IRA without penalty?
Within qualified exceptions to be explored with one’s adviser, an individual may begin distributions from a traditional IRA without penalty upon obtaining the age of 59 ½. Any distribution made prior to age 59 ½ that is not covered by an exception is subject to a 10 percent penalty, in addition to ordinary income taxes.

What is a required minimum distribution at age 70 ½?
Upon obtaining the age of 70 ½, an individual must begin taking annual distributions from a traditional IRA. The Internal Revenue Service publishes a standard life expectancy table that is used in determining your required minimum distributions. Failure to take a distribution will result in a 50 percent penalty of the difference between the required minimum distribution and the amount you actually withdrew. Many investors seek to convert their traditional IRAs to Roth IRAs to avoid or limit their required minimum distributions.

What is a Roth IRA?
An individual with earned income may make a limited direct contribution to a Roth IRA. This contribution is not deductible against ordinary income; however, all contributions and investment earnings are completely sheltered from taxation both before and after distribution. Similar to a traditional IRA, an individual may begin receiving qualified distributions (i.e., without penalty) upon obtaining the age of 59 ½ or within qualified exceptions to be discussed with your adviser.

Should I convert a traditional IRA to a Roth IRA?
The classic law school refrain applies to this question: “it depends.” Depending upon your current income and your corresponding tax bracket, along with your income need, if any, for distributions from your IRA upon obtaining the age 70 ½, your adviser will construct a decision tree for analysis. If it is determined, upon consultation and review with your adviser, that it is beneficial to convert (or partially convert) a traditional IRA to a Roth IRA, your adviser should strategically plan for distributions based upon tax modeling. If it is determined that a conversion is appropriate then the conversion must be completed by Dec. 31 of the calendar year.

A word of caution: Your adviser should be very well versed in accounting and taxation, and preferably he or she should be a CPA and/or lawyer. If converted correctly, an investor could greatly benefit from the advice; if converted incorrectly, an investor could face substantial avoidable tax. It is highly recommended that you consult your CPA investment adviser upon pending retirement, or certainly well before obtaining the age of 70 ½.

There are many types of advisory firms; what in your opinion is the most ideal for an IRA investor?
In our opinion, a fee-only fiduciary advisory firm is the most ideal for an investor (not merely fee-based, which is part fee and part broker commission, or offset). Unlike a brokerage firm or fee-based broker, which often only has a fiduciary duty when imposed by federal law, a fee-only fiduciary advisory firm always has a fiduciary duty, always is fee-only (no commissions, loads, surrender penalties, etc.), always is independent and objective, and can never have a conflict of interest. Additionally, many fee-only firms utilize institutional (low cost) as opposed to brokerage retail funds.

Perhaps most important to investors who trust all or part of their retirement savings with their adviser, it is best to look to firms with advisers that hold advanced degrees such as doctoral or master’s degrees in business, economics or law, and/or are CPAs in addition to having substantial industry experience. Unfortunately, while there are some exceptions, most industry designations are not academically based programs; instead, they are about marketing and sales training and cover only the very basics of financial planning.

Warning concerning beneficiary designations.
An issue not covered in this article due to the nature of it as a primer is the beneficiary designation for individual retirement accounts and the potential tax consequences of said designation. We highly recommend that you speak with an adviser very well versed in accounting and taxation, preferably an accountant and/or lawyer, regarding the correct IRA beneficiary designations for tax purposes. An incorrect beneficiary designation could result in substantial avoidable taxes upon the death of the IRA account holder.

Stephen L. Hicks, JD, MS, CPA, Roger L. Millbrook, JD, CPA/PFS, and W. Joseph Irish, CPA/PFS are Fee-Only Fiduciary Investment Advisers of Siena Wealth Advisors. Part of a larger Siena team, all professionals are lawyers and accountants and hold other advanced degrees or designations in the area of financial services. Siena is consistently listed by CPA Wealth Provider Magazine and Accounting Today magazine as one of the Top Investment Advisory Firms in the United States. Siena is the only investment firm headquartered in Mid-Michigan to make the exclusive list. Siena advisers can be reached at


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