If you’re like most people, you probably set up a traditional IRA (as opposed to a Roth IRA) years ago and you may have continued to make contributions on a regular basis. Depending on your personal situation, the money going into the account may have been fully tax-deductible, only partially deductible, or not deductible at all. But regardless of any tax break you got on your contributions, you haven’t had to pay tax on any investment income or capital gains generated inside the account.
You may also have used the same or a different IRA to receive rollovers from a 401(k) or another employer-sponsored retirement plan after you switched jobs. If it’s done correctly, such transfers aren’t taxable. With a traditional IRA, your only tax obligation comes when you take money out.
Often, IRAs get little scrutiny over the years. You may have left yours alone as you focus on more immediate financial priorities. Yet there are several reasons why it pays to look again at your IRA.
1. Investment allocations may need to be adjusted. Your retirement accounts undoubtedly suffered during the stock market decline of a few years ago, and depending on how the money is invested, the account balance may or may not have since regained lost ground. If you haven’t already revisited your investment allocations, now would be a good time. Do the assets in the account—normally mutual funds or individual stocks and bonds—support your long-term financial goals? Does the investment mix feel comfortable in terms of the financial risk it entails? Do you need to rebalance, trimming allocations that have grown too large and adding to those that fall short of the ideal percentage in your portfolio?
2. Beneficiary designations could be out of date. When you set up your IRA, you had to indicate who would receive the account assets if you died. But your financial circumstances may have changed since then. A divorce would have obvious implications, and retirement plan assets are often a part of the financial settlement when a marriage breaks up. Other family changes, however, can be easy to overlook. You and your spouse may decide to divide the account among your children, and if they’re minors, the beneficiary designation would be different than if they’ve already reached the age of adulthood in your state. The important thing to remember is that you’re not bound by your original choices, but it’s important to know what your beneficiary form says.
3. Additional rollovers or transfers may be in order. Consolidating your retirement accounts in one place has several potential advantages. Getting allocations right in a single account is easier than trying to mix and match investments in several, and you can hold all of your money in an account that meets your priorities regarding investment choices, fees, service, and other factors. Just keep in mind that rollovers must be completed within 60 days to avoid current taxes, and in order to avoid having taxes withheld in a transfer from an account at work, you need to arrange for a “trustee-to-trustee” transfer in which you never touch the money. (Otherwise, you’ll have to wait until you file your taxes to recoup the withheld amount.) The same rules apply whether you’re moving from a 401(k) to an IRA or moving money between two IRAs. But if you rollover funds from one IRA to another, you can’t do another rollover involving those accounts for at least a year.
4. A Roth IRA might be a better fit. If you established an IRA before 1998, a Roth IRA wasn’t an option, and before 2010, converting a traditional IRA to a Roth may not have been possible because of a $100,000 ceiling for modified adjusted gross income in the year of conversion. But now, anyone can convert an IRA to a Roth IRA, which provides tax-free distributions during retirement. To get that advantage, you’ll have to pay income tax on the previously untaxed funds you move from a traditional IRA. Whether a conversion makes sense for you depends on several factors, including whether you expect to be taxed at a higher or lower rate during retirement, and whether you intend to leave all or part of your retirement account to your heirs. You can also decide to make only a partial conversion, or to move the money gradually over several years.
Your retirement accounts are an essential part of your overall financial picture, and we’ll work with you to make sure your money is deployed in a way that makes the most sense for your situation.
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