There are plenty of opportunities—and a few pitfalls—for individual retirement account (IRA) owners. While you don’t want to fall into a tax trap, you should definitely take advantage of these IRA tax tips and smart strategies available for 2024.
Individual Retirement Account Varieties: Traditional and Roth IRAs come in two varieties: Traditional and Roth. The Traditional IRA generally provides a tax deduction for contributions, tax-deferred growth, and taxable distributions upon withdrawal. On the other hand, Roth IRAs don’t offer an immediate tax deduction, but your distributions in retirement are tax-free.
This leaves IRA owners with an important decision, one that has long-term consequences. If you can contribute without needing the tax deduction, a Roth IRA might be the better choice in many cases. However, be aware that high-income earners face restrictions on contributions to both types of IRAs.
💡 Potential Pitfalls with IRAs
Here are some common pitfalls that can trip up IRA owners:
- 📌 Early withdrawals – The government designed IRAs as retirement savings vehicles, so tapping into your account before age 59½ often comes with a 10% early withdrawal penalty on the taxable amount. However, there are certain exceptions to this penalty.
- 📌 Excess contributions – The tax code sets annual limits for IRA contributions. Exceeding those limits results in a 6% excise tax penalty on the excess amount, which continues until the over-contribution is corrected.
- 📌 Multiple rollovers – While you can take possession of IRA funds for up to 60 days during a rollover, only one rollover is allowed per 12-month period. Exceeding this results in the additional rollover being treated as a taxable distribution—and an excess contribution if it’s redeposited into another IRA.
- 📌 No Traditional IRA contributions after age 70½ – Once you hit age 70½, you’re no longer allowed to contribute to a Traditional IRA, though Roth IRAs don’t have this restriction.
- 📌 Failing to take a required minimum distribution (RMD) – Traditional IRA owners must begin taking RMDs at age 73 (previously 70½). If you fail to do so, you’ll face a steep penalty equal to 50% of the RMD amount. Roth IRAs are exempt from RMDs while the account owner is alive.
- 📌 Late contributions – You can still make IRA contributions for the prior year until the tax filing deadline (April 15). This is helpful if you’re unsure whether you could afford a contribution before the year ended.
- 📌 Backdoor Roth IRA – High-income earners may not be able to contribute directly to a Roth IRA, but there’s a workaround known as the backdoor Roth. This involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. Be cautious of the tax implications, as the IRS treats all IRAs as one when calculating conversion taxes.
💸Saver’s Credit
For low- to moderate-income taxpayers, the Saver’s Credit can help offset the first $2,000 contributed to an IRA or other retirement accounts. This credit is available on top of any other tax benefits from contributing, but it has limited availability. Reach out to learn more about whether you qualify.
📩 IRA-to-Charity Direct Transfers
If you’re 70½ or older, you’re required to take RMDs from your IRA. You can take advantage of a special provision that allows direct transfers of up to $100,000 per year from your IRA to a qualified charity. This not only satisfies your RMD but can also lower your taxable income, helping you benefit even if you don’t itemize deductions.
Maximize Your IRA Tax Benefits
IRA owners face plenty of decisions and potential pitfalls, but with the right guidance, you can turn these to your advantage. Whether you’re planning for your RMDs, looking into a backdoor Roth IRA strategy, or simply trying to avoid common missteps, having a proactive approach to your IRA can save you a lot of tax headaches.
Ready to take control of your IRA tax strategy? Reach out today, and let’s plan your path to a secure retirement. We’re here to help you navigate the complexities with ease.