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Vincent appeared on CFN Live on January 26th to discuss “The Nuts and Bolts of IRAs – Part Two”

Colleen: Funding IRAs (Individual Retirement Accounts) is a good way to fund your retirement?  Today, we will discuss with Vincent J. Russo some of the ins and outs of funding IRAs – Part Two.

Vincent: This is definitely a timely topic since we have file tax returns for last year by April 15^th and we are now in a new tax year.

When we spoke last, we discussed:

• The benefits of IRAs as a retirement plan strategy
  1. IRAs are a vehicle for one to save for their retirement years.
  2. There are several benefits for having an IRA.
     1. IRAs are accessible and easy to set up
     2. You can take advantage of a traditional IRA tax break right now

Or defer your ROTH IRA tax break until retirement

1. Your IRA is exclusively yours.

• Who can fund an IRA and with how much each year?
  1. Almost anyone can contribute to a Traditional IRA, provided you have earned income. If you’re married and one of you doesn’t work, the employed spouse can contribute into a so-called spousal IRA for the other.
  2. For 2021 or 2022, you can contribute up to the lesser of 100% of your earned income or $6,000.
  3. Once you reach age 50, contribution limits on IRAs are increased to $7,000 per year (additional $1,000 as a catch-up contribution).
• The difference between a Traditional IRA and a Roth IRA
  1. There are two types of IRAs: Traditional IRAs and ROTH IRAs. A traditional IRA is funded with pre-tax dollars and a ROTH IRA is funded with after tax dollars.
• And lastly, when to fund your IRA account
  1. IRA contributions can be made anytime during the year or by the due date for filing your tax return for that year. The best time to fund an IRA is January 1st of the tax year.

 Colleen: Vincent, can you start with an example of the power of funding an IRA?

Vincent: The benefits are clear due to Tax deferral and Compounding. The immediate tax savings can compound over time if you invest them.

For example, say starting at age 30 you contribute $6,000 to your IRA each year for 37 years. Imagine this saved you $1,500 in income taxes each year, and you took that money and invested it separately. At the end of those 30 years, you would have $763,609 (after tax – $649,067 versus $409,686 (if you invested outside of the IRA).

 Colleen: So, let’s move on to taxes When do you pay the taxes on your IRA

 Vincent: Eventually, you will have to pay taxes on your Traditional IRA. Your withdrawals will be subject to ordinary income tax. On top of that, if you take the money out before turning age 59 1/2, you can be hit with a 10% penalty.

You will also be obligated to take required minimum distributions (RMDs) from a Traditional IRA after you turn age 72, so you won’t be able to avoid the IRS forever.

Now with a Roth IRA, there is no tax on withdrawn contributions or earnings if over 59 ½ and the account has been held at least five years.

Colleen: Can you give examples of when you can take money out of an IRA without a penalty 

Vincent: There are nine exceptions to the Penalty Rule (when you make withdrawals prior to age 59. Let me address this list quickly:

• Made on or after the date you turn 59½
• Taken because you have a permanent disability
• Made by a beneficiary or your estate after your death
• Used to buy, build, or rebuild your first home (a $10,000-lifetime maximum applies)
• You’re taking a series of substantially equal distributions
• You have unreimbursed medical expenses exceeding 10% of your adjusted gross income (AGI)
• You’re paying medical insurance premiums after losing your job
• The distribution is due to an IRS levy
• You’re taking qualified reservist distributions
• You need the money for qualified disaster recovery
• You’re taking the distribution to pay for qualified education expenses
• You’re covering the cost of childbirth or adoption expenses, up to $5,000

Now, to confuse matters, if the early withdrawal is from a Roth IRA, there is no penalty for withdrawing ROTH IRA contributions; but the penalty rules to apply to withdrawal of earnings.

Colleen: When must you take IRA Distributions

 Vincent: You will also be obligated to take required minimum distributions (RMDs) from a Traditional IRA after you turn age 72, so you won’t be able to avoid the IRS forever.

The amount you take is based on an IRA Table – the starting point is age 72 (unless you were 70 prior to July 1, 2019). The amount must by taken by April 1of the following year.

One of the big distinctions from a Roth IRA and a Traditional IRA is that there is no requirement to take RMDs from a Roth RIA.

Another day we will address this subject in greater detail and Inherited IRAs.

Colleen: Vincent, why is this so important to fund a retirement account?

Vincent: Colleen, we are living longer and before one realizes it, they have to figure out how to live in their retirement years. Today is the day for everyone to make sure they are funding their retirement accounts for the future – before it is too late.

 For more information on these topics and more, you can download for free our Planning Guides from our law firm website at vjrussolaw.com

Vincent can be found on past CFN Live episodes by clicking here.
Topics include:

• NYS Medicaid Home Care Program Changes
• Estate Planning Basics Part 1: Why do I need an Estate Plan?
• Estate Planning Basics Part 2: What is Included in an Estate Plan?
• Estate Planning Basics Part 3: When and Why do I need to update my Estate Plan?
• Estate Planning for Children with Special Needs Part 1: How do I provide for and protect my child?
• Estate Planning for Children with Special Needs Part 2: What Government Benefits are Available?
• Estate Planning for Children with Special Needs Part 3: What Steps Do I Need to Take for my Adult Child with Special Needs?
• Long Term Care Planning Part 1: “How Do I Pay for Long Term Care?”
• Long Term Care Planning Part 2: “How Can Medicaid Home Care Help Me?”
• Long Term Care Planning Part 3: “How to Qualify for Medicaid”
• What is a Power of Attorney?
• Important Legal Updates

We hope you tune in to CFN Live. It is a dynamic show with current news and fascinating contributors who have inspiring stories to tell. The new show CFN Live airs Monday through Friday at 9 am & 7:00 pm. You will be able to watch the show anytime, at your convenience, on the CFN YouTube Channel.

You can learn more about the Catholic Faith Network and CFN Live by visiting https://www.catholicfaithnetwork.org/cfn-live.

Russo Law Group’s Managing Partner, Vincent J. Russo, is a featured contributor on the Catholic Faith Network’s new show CFN Live. Vincent is the show’s Legal Correspondent. In his segment, entitled “In the Legal Know,” Vincent will keep you abreast of the latest legal developments including elder law, special needs and estate planning — all to help you make informed planning decisions to protect yourself, your loved ones, and your assets.