The Truth About Your IRA

An Individual Retirement Account is known as an IRA, but the original IRA acronym stands for Individual Retirement Arrangement. One of the first aspects of an IRA is the custodial fees, the administration charges for accounting and client contact. Then you have to consider the funding instrument and its costs: mutual funds, exchange trade funds and annuities.

If you qualify for the tax deduction, you need to determine if the tax savings during your working years is worth the tax consequences later in retirement. Distributions from your IRA are taxed at ordinary income taxes in your effective tax bracket and are includable in the provisional income test to determine if your IRA triggers taxation on your benefits. (Keep in mind that there is no tax-free basis in an IRA, i.e. your original contributions.)

IRAs and Health Savings Accounts are the most under utilized tax advantaged funding vehicle available for tax-deductible contributions up to $3,400 for individuals, $6,750 for married couples and an additional $1,000 for those over age 55. The IRS also allows a one-time maximum tax-free transfer of $6,750, (or $7,750 if you’re age 55 or older), once in your lifetime from an IRA to an HSA account. Keep in mind that you can’t transfer and make an annual contribution in the same tax year. The tax-free distributions from the HSA account can only be used for medical expenses and insurance premiums for long-term care, disability, medical and Medicare. One huge benefit is the ability to use your HSA account at any time. There’s no waiting until age 59½ like other qualified retirement accounts. The distributions are tax-free and are not includable in the provisional income test for Social Security. The odds are that you will use this account throughout your lifetime for medical expenses and related insurance premiums. 

A Roth IRA is an alternative to tax deductible defined benefit and defined contribution plans. Roth IRAs can’t be deducted, but their proceeds are tax-free during conventional retirement years. So, is the tax deduction worth your participation in an IRA strictly on the basis of tax savings? 

You need to weigh the net affect of an IRA versus a ROTH IRA or cash value life insurance before committing these ideas to your retirement plan.