SHOW NOTES: 2019-03-28 MiM

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Last Week’s Question of the Week: According to Social Security, once I have reached my full retirement age, how much am I able to earn WITHOUT reducing my benefit? A) unlimited earnings or B) $10,000

ANSWER: There are no limits on earnings for workers who are “full” retirement age or older for the entire year. In other words, you can have unlimited earnings after reaching your Full Retirement Age without reducing your benefit.

HOST: I know everyone is still busy completing their taxes for last year. What do we need to know about IRA contributions for last year’s taxes and changes for this year?

KLAAS FINANCIAL: Yes, this is a great time of the year to make sure that whether or not you are putting away money into your retirement accounts, you take stock and re-visit:

  1. Are you putting away some money?
  2. Are you putting away enough money?
  3. Where (what kinds of accounts) should you be directing those funds?

It is important to understand that there are different types of retirement accounts available, so we like to return to the basics on this show from time to time.

  • What is an IRA? An Individual Retirement Account allows for you to put away funds designated for your future retirement.
  • How do I get an IRA? Where can I get one? What does it do for me? What are the restrictions associated with one? Should I put an IRA into an annuity? How much can I contribute every year?

Contribution limits for IRAs do change somewhat each year:

  • FOR TAX YEAR 2018 the annual contribution limits into an IRA is $5500, with a catchup amount of $1000 if you are over 50. Remember that 2018 IRA contributions can be made up until April 15, 2019. This should reduce your taxable income if it is put into a traditional IRA; a Roth IRA contribution will require you to pay taxes today.
  • FOR the new tax year, 2019 (next year when you file!) the contribution limits have increased to $6000 per person with the catchup limit remaining at $1000 if you are over 50. Specifically, you have until each year’s tax deadline to make your IRA contributions.

Remember, the contribution limit is per person, not per account. You can have more than one IRA , perhaps a traditional IRA and a Roth IRA — but your total contributions for 2018 or 2019 cannot exceed the limits.

HOST: What should we know about the different types of IRAs available and how long can we contribute to them?

KLAAS FINANCIAL: You should remember you must have earned income for the year to be able to add money into an IRA. Also remember, Spousal IRA’s for non-working spouse. If you have a non-working spouse, you can contribute on their behalf up to the allowed limit. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. Define earned income: Earned income is an IRS term for income that is obtained by participating in a business or trade. Earned income typically includes salaries and bonuses, wages, commissions and tips.

Also keep in mind you cannot contribute to a Traditional IRA after the age of 70.5, but you can contribute to a Roth IRA with no age restriction. You can also contribute to your 401k after age 70.5, if you are still employed with firm and not a 5% or more owner of firm.

When it comes to Traditional IRAs vs. ROTH IRAs, here’s a few things to remember:

  • Which offers better returns? Sometimes we are asked which type of IRA will get them better returns. Remember the type of account registration has nothing to do with the underlying investments.
  • Remember that you never paid taxes on the money you have put in the traditional IRA (taxes are being deferred, however you will pay when you make distributions.) While a Roth IRA doesn’t allow for an immediate tax deduction on contributions, distributions will come out to you tax free.
  • Another unique feature of Roth IRAs is that you don’t have to take your money out no matter how old you get.
    With traditional IRAs and 401(k) accounts, you are required to take minimum distributions (RMD’s) once you reach age 70-1/2. In other words, you must start taking your money out, even if you don’t need it. This shrinks your savings and thereby reduces their compound growth.
  • In a Roth IRA, you can leave your money in as long as you want, even if you live to be 100 or more. This lets you take full advantage of tax-free compounding for as long as you want. And if you plan to leave some of your IRA savings to loved ones, a Roth IRA will let your savings grow untouched until the day you die. So, if there’s a good chance you won’t need to tap into your IRA early in retirement, a Roth account could be the best option for you as well as for your heirs.
  • Roth IRA phase-outs — In 2019, the AGI phase-out range for taxpayers making contributions to a Roth IRA is $193,000 to $203,000 for married couples filing jointly, up from $189,000 to $199,000 in 2018. For singles and heads of household, the income phase-out range is $122,000 to $137,000, up from $120,000 to $135,000 in 2018.

  • HOST: Do most people have an IRA account? And how long have IRAs been around?

    KLAAS FINANCIAL: Hopefully, everyone has some type of retirement savings account, whether it is a retirement plan at work, a 401k, 403b, a pension or an IRA. An interesting fact is, only 33% percent of Americans have an IRA (according to the TIAA (Teachers Insurance and Annuity Association) Survey, January 2017). IRAs have been around for more than four decades. They were first introduced back in 1974 and, at the time, the annual contribution limit was just $1,500 per person. Currently, it’s up to $5,500/$6,500.

    HOST: So besides traditional and Roth, what are the other IRAs available?

    KLAAS FINANCIAL: A SIMPLE IRA plan provides small business employers with a simplified method to contribute toward their employees’ and their own retirement savings. Employees may choose to make salary reduction contributions and the employer is required to make either matching or nonelective contributions. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SIMPLE IRA). Limits are $12,500 with a $3,000 catch-up provision for over 50 in 2018. In 2019, the limit increases to $13,000.

    A SEP IRA plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can contribute. For 2018, the contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of 25% of compensation or $55,000. In 2019, the limits increase to $56,000.

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    Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.