05 Aug 2016 Four Things You Might Not Know About Your IRA
Today’s Brief focuses on some powerful financial and budget planning options available to IRA owners. It was inspired, in part, by a recent blog on Health Savings Accounts by our friend Ryan Smith of Stonegate Financial.
IRAs are a powerful tax-deferred saving vehicle owned by many as the result of rollovers from other retirement plans such as 401(k)s, 403(b)s and other pension plans, or they were started outright to begin retirement savings in earnest. While IRAs have been around for decades, their features and options change often with new budgets and IRS rulings.
Some of the ideas mentioned below have been around for a few years, while others are brand new. Here are four you may not have heard about that we believe offer significant planning benefits.
Contribute to Your HSA Using IRA Funds
Health Savings Accounts (HSAs) are becoming increasingly popular as medical expenses and plan deductibles continue to rise. HSA’s are funded by individuals, families, and employers with pre-tax dollars and accumulate tax free when used to pay qualifying medical expenses.
To open an HSA, you must own a high deductible health plan (HDHP) with a deductible no lower than $1,300 for an individual and $2,600 for a family. Annual pre-tax contributions are reasonably generous, but are limited as follows:
|
Year |
Contribution Limit (Single) |
Contribution Limit (Family) |
Additional Catch-Up Contribution (55 or older, Single and Family) |
|
2016 |
$3,350 |
$6,750 |
$1,000 |
|
2017 |
$3,400 |
$6,750 |
$1,000 |
If you determine that a high deductible health plan is the right plan for you and/or your family then you should consider also establishing an HSA.
In addition to your normal HSA contributions, if you meet certain conditions, you may be able to make a once-in-a-lifetime, tax-free contribution up to your annual contribution limit to your qualified HSA using funds from your traditional IRA.
Your HSA must be open and funded before April 15th (no extensions), but the IRA-to-HSA rollover is tied to the calendar year the transfer is made. Your high deductible health plan must also be active during the same calendar year.
HSAs Are Superior to IRAs in Some Significant Ways
You might consider funding an HSA if you qualify. They offer several unique advantages over IRAs both today and in retirement.
- Funds not used for medical expenses accumulate tax deferred just as they do in IRAs.
- After age 65, funds can be withdrawn for any reason (not just medical) free of the 20% penalty, but still taxed as ordinary income, just as IRA distributions are.
- A significant advantage of HSAs is that they have no required minimum distributions (RMDs) like IRAs do after age 70 ½.
- As Ryan points, paying for substantial medical bills in retirement with tax-free withdrawals from an HSA instead of taxable withdrawals from an IRA can help avoid an income-related adjustment in Medicare premiums. (How are Medicare Part B premiums determined?)
The IRA 60-Day Rollover
If you need cash for a short time and don’t want to employ more formal lending arrangements, your IRA might just provide the solution. Beginning in 2015 the rules became more restrictive, but the basic option remains.
Under the new rules, you can access funds in your IRA for up to 60 days, tax-free, as long as you pay the exact amount back within the 60-day window. You can only access money from an IRA you own once in a 12-month period – NOT A CALENDAR YEAR BUT 12 FULL MONTHS.
Failure to pay the funds back in time triggers a bill for ordinary income tax and a 10% penalty if you are under 59 1/2 years old. Overlapping rollovers within a 12-month period triggers taxes and a penalty as well. Be aware too, that you will miss any market moves, dividends and interest while the funds are out of your IRA. It is an option that should be used sparingly and only after careful consideration with your advisor.
Use Your IRA to Give Up to $100,000 Annually to Charity – AND AVOID RMDs
You are probably aware that if you are 70 1/2 or older the IRS requires that you withdraw taxable distributions from your IRAs and certain other retirement plans based on your life expectancy. But did you know that you can now use your IRA required minimum distributions (RMDs) to directly fund your charitable giving up to $100,000 a year?
This one’s pretty simple. By instructing your advisor to direct all or part your annual IRA RMD (up to $100,000) to a qualifying charity or charities, you can satisfy some or all of your giving goals, get the usual tax break and satisfy part or all of your IRA minimum distribution requirements for the year.
QCDs offer several advantages over taking your required minimum distribution and then contributing the proceeds of that distribution to a charity. In large part because taxable IRA distributions must be included in your adjusted gross income which can cause the income taxes due on your on your Social Security to increase, cause your Medicare insurance premiums to increase, and impact many other tax related items tied to your adjusted gross income. Making a QCD satisfies your RMD requirement without impacting your adjusted gross income.
Unfortunately, donor-advised funds are not eligible for QCDs. Congress recently made the QCD tax break permanent.
If you have questions about these or any other IRA related topics please feel free to contact us.
