A Primer on Individual Retirement Accounts (IRAS)

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 December 31st of the calendar year.

Stephen L. Hicks, JD, MBA, MS, CPA, Roger L. Millbrook, JD, CPA/PFS, W. Joseph Irish, CPA/PFS, and Zachary H. Armstrong are Fee-Only Fiduciary Investment Advisers with Siena Wealth Advisors in Grand Ledge. 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 advisers can be reached at info@sienainvestor.com.

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