There are enough limitations and restrictions on retirement planning, get all you can with these IRA loop-holes
The deadline for your 2015 IRA contributions is approaching fast and there’s no extension as there is for filing. Even if you get an extension to file your income taxes late, your last day to make an IRA contribution for the 2015 deduction is April 18th. The deadline is just one of the long list of rules and limits on your IRA contributions, many of which seriously restrict your ability to plan for retirement.
Against all the eligibility rules and other requirements on retirement plans, there are three IRA loop-holes that can actually help you get more out of your retirement accounts.
Understanding these IRA loop-holes and when they apply is your first step in getting the retirement you deserve.
IRA Loop-holes the IRS doesn’t Want you to Know
You are not allowed to contribute to an IRA if you haven’t earned income for the year. This would make it impossible for a homemaker or someone that’s long-term unemployed to meet their retirement goals. Fortunately, you can take advantage of what’s called the Spousal IRA which says you can contribute to your own IRA even if you didn’t earn income as long as your spouse earned an income.
Combined contributions cannot be more than the total household compensation and both your contributions are deductible. Even if you are not worried about putting money away for retirement while you’re not working, contributing to your IRA using the spousal exemption is a great way to protect more money from taxes.
Roth IRA conversions can be a great way to diversify your tax burden in retirement. Nobody really knows what their tax rate will be in retirement, other than it’s almost certain that the government will raise taxes broadly. Holding some of your retirement money in a Roth IRA, which means tax-free withdrawals, will help smooth your tax responsibility.
But what if you contribute to a Roth IRA account and then find out you made too much money for eligibility? What if you converted funds into a Roth IRA and then realize that the increased income taxes are going to put you into a higher bracket?
A Roth recharacterization allows you to change a contribution from a Roth IRA to a traditional plan or to nullify a Roth conversion. Your IRA custodian will send you a 1099-R distribution form and you’ll fill out the contribution on a 5498 form. A recharacterization must be done before October 15th of the following year, so October of 2016 for recharacterizations of 2015 accounts. You’ll need to file an amended tax return if you do a recharacterization after your file your taxes.
When you convert a traditional IRA into a Roth IRA, you must pay income taxes on the entire amount immediately, pushing many people into higher tax brackets during the year of conversion. One way to avoid this is by converting funds from a non-deductible IRA.
Non-deductible IRA is a little misleading because it isn’t a different type of retirement account but just a different way of contributing to your traditional IRA. Any contributions you make to a traditional, deductible IRA that are over your annual limit are considered non-deductible IRA contributions. You pay income taxes on the amount during the year earned. It’s basically just co-mingling your retirement funds with regular invested funds.
If part of your IRA contribution is non-deductible, you need to file and retain a copy of Form 8606 for taxes. Your records and these forms will be critical in understanding how much tax you owe on your IRA withdrawals. Since some of your contributions were already taxed as income, you won’t have to pay taxes on it again when you retire.
While your contributions are not taxed when you withdraw them from a non-deductible IRA, your earnings will be taxed as income along with your contributions and earnings for the deductible portion of the IRA.
These IRA loop-holes are three of the most powerful for getting the most out of your retirement accounts and meeting your retirement goals. The government puts enough restrictions and limits on your retirement planning, get everything you’re entitled to by taking advantage of loop-holes where they exist.