IRAs EXPLAINED

IRAsExplained

An Individual Retirement Account (IRA) is a taxadvantaged way for you to save for your retirement. Originally established by Congress in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA), over the years there have been additional variations of IRAs created to better accommodate American workers. For now, and with the tax deadline rapidly approaching, let’s take a quick moment to review Traditional as well as Roth IRAs and discuss why you may want to invest in one now.

THE BASICS

An IRA is not a financial “product”, but rather a type of financial account. It is common for IRAs to be invested in publicly traded securities like stocks, bonds, and/ or mutual funds. As there are a variety of ways that you can invest your IRA, there can be some significant differences from one IRA account to the next. The main benefit to the investor is the tax-deferred growth potential of an investment in an IRA. Unlike a traditional brokerage account or savings account, earnings grow tax-deferred and are not taxed until distributed from the account. As a result, the investor has the potential for additional earnings on top of past earnings which over time can create a meaningful advantage.

ROTH IRA

The Roth IRA, named after Delaware Sen. William Roth, was introduced to the investing public in 1997. Investors in a Roth IRA contribute after-tax dollars that grow tax-deferred and which can create a tax-free stream of income. With this approach, the investor is paying their taxes on the account “up front” rather than when they withdraw the funds in retirement. Rules around eligibility to have a Roth IRA can be complex and you should consult your qualified tax counsel as well as your financial advisor to see if this type of IRA is a good fit for you. If you own a Traditional IRA and are contemplating converting it to a Roth IRA, we encourage you to work with qualified advisors to evaluate the pros and cons of doing so.

Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation does not ensure a profit or protect against a loss. Holding investments for the long term does not ensure a profitable outcome. Future investment performance cannot be guaranteed, and investment yields will fluctuate with market conditions. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Tom McCartney and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

Common questions we are asked about IRAs

n How much can I contribute to an IRA? As a result of the SECURE

Act which came into effect on 1/1/202, individuals with earned income can contribute with no age restriction. The annual contribution limit for 2023 is $6,500, or $7,500 if you’re age 50 or older (the limit for 2022 is $6,000, or $7,000 if you’re age 50 or older). Your Roth

IRA contributions may also be limited based on your filing status and income. See IRA Contribution

Limits. n Is my IRA contribution deductible on my tax return?

If neither you nor your spouse is covered by a retirement plan at work, your deduction is allowed in full. For contributions to a traditional IRA, the amount you can deduct may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Roth IRA contributions aren’t deductible. n Can I contribute to a traditional or Roth IRA if I’m covered by a retirement plan at work? Yes, you can contribute to a traditional and/ or Roth IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE

IRA plan). If you or your spouse is covered by an employer-sponsored retirement plan and your income exceeds certain levels, you may not be able to deduct your entire contribution. n I want to set up an IRA for my spouse. How much can I contribute? If you file a joint return and have taxable compensation, you and your spouse can both contribute to your own separate

IRAs. Your total contributions to both your IRA and your spouse’s IRA may not exceed your joint taxable income or the annual contribution limit on IRAs times two, whichever is less. It doesn’t matter which spouse earned the income.

COMMON MISTAKES OUR TEAM SEES

Our team is fortunate to frequently meet new people and some of the most common mistakes we see investors make include the following: 1. Having an annuity in their IRA without good reason. IRAs are already tax-deferred. Unless there is a specific characteristic of the annuity beyond tax-deferral that is advantageous for your circumstance, this can be an expensive mistake. 2. Having municipal bonds in their IRA without good reason. Again, IRAs are already tax-deferred. If your municipal bonds have a lower yield than investment-grade corporate bonds, they probably don’t belong in your IRA. 3. Not establishing an IRA for a nonworking spouse. 4. Not contributing to an IRA because you can’t deduct that year’s contribution. Remember, the real power of an IRA is the opportunity for potential tax-deferred growth over time. Don’t neglect funding an IRA based solely on whether you can deduct that year’s contribution. Getting ready to file your taxes? It may not be too late to still open an IRA for the 2022 tax year. Still have questions? Give your financial advisor or our team a call!

 Tom McCartney is the Founding Principal of My Advisor & Planner and a Wealth Manager. Securities and Investment Advisory Services Offered Through Raymond James Financial Services, a Registered Broker/Dealer and Investment Adviser, Member FINRA/ SIPC. My Advisor & Planner is independently owned and operated. Tom and his team can be reached at info@mapyourfuture.net, at 630-457-4068, or you can visit them at www.mapyourfuture.net.