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IRA Tips & Warnings - Part 2


Last week, I credited bottomelineinc.com, as one of my favorite websites.  There, you can find interesting information on a wide variety of topics.  One recent financial piece from them discussed things you need to know about IRAs, so as to not wind up making financial mistakes.

According to the website bottomlineinc.com, there are more things everyone should know.  I have embellished with my comments and observations (in italics and indented):

1) Real estate and other nonstandard IRA assets are allowable in IRAs, subject to certain rules.

  • Rules for holding real estate in your IRA are onerous and complex, and should only be done after reaching an in-depth understanding of those rules.

2) Working spouses can contribute to an IRA for a non-working spouse, subject to the same rules all IRA owners have, including earned income limitations and age-based contribution limits.

3) Workers with 401(k) Plans can contribute to both the 401(k) and an IRA, subject to similar limitations; know the rules to stay out of trouble.

  • In our financial planning practice, we see many people who have unknowingly made illegal contributions to IRAs, especially Roth IRAs, over several years.  Penalties are high and ongoing.  Know the rules.

4) Workers with employers who match part of the 401(k) contributions should try to max out the 401(k), at least to the matching funds limits.

  • I would add that many employers, including the Federal Government with the TSP Plan, will limit the amount of matching funds in any given pay period, so the worker must know when the contribution would be limited.  Some employers require 401(k) contributions from every paycheck to qualify for matching funds.
  • I would also add that many workers with 401(k) accounts earn too much money to contribute to a Roth IRA, but through a process called the “back door Roth contribution,” many can make the contribution.  Again, the rules are important.  This method is under scrutiny from the IRS, so caution should be exercised.

5) Required Minimum Distributions (RMDs) must be taken from non-Roth (and non-inherited) IRAs when the owner turns 70-1/2.

6) RMDs can be avoided if the person is still employed, and assuming all IRA funds can be rolled into the 401(k).

7) RMDs may be taken “in-kind” to avoid liquidation of assets that the IRA owner would rather not sell; have the custodian value the assets for distribution to avoid penalties.

  • I would add that the “wash sale” rules for selling and repurchasing assets crosses from taxable accounts to IRAs.  In a “wash sale,” an asset is sold for a loss, then repurchased in less than 30 days, generally for tax reasons, but the loss is not allowed as a tax deduction during that period.  Selling for a loss in a brokerage account, then repurchasing the same asset in an IRA, will not avoid the “wash sale” rule, and would not protect the tax-deductible status of your loss on the sale.  You must wait 30 days to repurchase in any account to preserve your loss.

IRAs are an important building block in a financial plan aimed at achieving financial independence.  Knowing the rules can save time, money, and avoid headaches.

Van Wie Financial is fee-only.  For a reason.