IRA Tips For 2016

IRA Tips for 2016

Published on Mar 1, 2016
Know what you’re eligible for, take advantage of workarounds and recharacterization, and–above all–don’t wait until the last minute, says retirement expert Ed Slott.

This video is part of Morningstar’s Tax Relief Week 2016. For more information on our Tax Relief coverage, visit: ow.ly/YBODh .

IRA Tips for 2016

0:02I’m Kristin burns for morningstar.com April 18th is your tax filing deadline
0:08for the 2015 tax year and it’s also your IRA contribution deadline for 2015
0:13joining me to share some tips on those contributions is retirement expert at
0:18slot at thank you so much for being here to be here in chicago thank you for
0:22being here in studio let’s talk about April 18 thats the tax filing deadline
0:27this year and it’s also your deadline for making an IRA contribution one key
0:32piece of advice you have on that front is don’t wait till the very last minute
0:36it probably doesn’t matter that I tell people that the people are gonna do it
0:40gonna do it anyway they like the Russia in at the post office or at the bank the
0:43last minute but it’s different I’m filing your taxes you have to get an IRA
0:48contribution that’s the last day to get an IRA or Roth IRA contribution but last
0:53year for 2009 chain in and there’s no extensions so even if your regular
0:59return is on extension there’s no extension for making it 2015
1:04contribution reprise their contribution past the normal April 15th which is now
1:09April 18 this year because of the holiday but don’t wait till then try and
1:13do it at least a week before you can get the same rush so it’s a little bit
1:19confusing for people attempting to sort among the various income limitations
1:24that apply to a traditional deductible IRA and Roth IRA but you say it’s really
1:29important that people make sure that they are eligible to make right of
1:32contribution that they’re trying things change and you have to know the
1:35eligibility rules and unfortunately the tax code made it more complicated for
1:40the most part I raised in Roth IRA Hayes fall under I raised but the rules for
1:45eligibility are almost opposite for example with IR raised there are no
1:50income limit with Roth IRAs and we’re talking contributions only there are
1:55income limits they’re very high but their income limit for Roth IRA is
1:59there’s no age limits but for IRA is traditional IRA as you can
2:03funded traditional IRA but the year you turned 70 and a half later years so you
2:08have to make sure you’re eligible and of course to do either you have to have
2:13earned income
2:14so people in retirement maybe I can just keep funding this contributing now you
2:18have to have earned income that’s w-2 wages self-employment income the only
2:23exception to having earned income is there something known as spousal IRA
2:28Hayes if you have a spouse that’s not working that doesn’t have wages and
2:32self-employment that spouse can use the working spouses income to qualify but
2:38the spouse still has to qualify on their own for example if one spouse is working
2:43say one spouse is working and that spouse is in their sixties but the other
2:48spouse is not working is 75 now the other spouse is not working who is 75
2:53can use that spouses wages but she doesn’t qualify anyway cuz she’s over 70
2:59and a half so but you could qualify for Roth where there is no age limitation
3:04right so one thing I wanted to ask there was if I inadvertently fund the wrong i
3:10RA type so I open a Roth IRA and I wasn’t eligible to make a contribution
3:14there what’s the workaround what do I have to do it gets a little complicated
3:18first make sure you’re eligible employee gets a little messy there’s something
3:22called a tree characterization where you can undo it so you did exactly what you
3:26said you did a rock but your income was too high and now you can have a row you
3:31could re- character characterize it as a traditional IRA as long as you would
3:36have qualified for a traditional IRA anyway for example let’s say the reason
3:41you didn’t qualify for authors could you had all these earnings you have the
3:44earnings but what if you I seventy-five you can’t we characterize to a
3:49traditional IRA because of the age limitation you wouldn’t have qualified
3:53then it has to come out plus any income on that otherwise you have a six percent
3:58excess contribution penalty so it’s got to be removed by october fifteenth of
4:02the year after the contribution was made so it gets a little messy sure you
4:07qualify you’re eligible and you contribute to the right account whether
4:11it’s IRA or Roth IRA ok so you’ve mentioned a couple of times these income
4:15limitations that apply to budget director Roth IRA cut a lot of people in
4:20recent years have been talking about this workaround

IRA Tips for 2016

IRA Tips for 2016
4:23and sometimes called the back door Roth IRA let’s talk about that and you say
4:27it’s a little bit of a misnomer because really it’s kind of a two-step process I
4:32wouldn’t call it a back door of people call it that because it’s a way to get
4:36money in a row with even though let’s say you’re over the income limit for a
4:39Roth but you’re not over the income limit for a traditional IRA because
4:43there are no income limit so it’s two separate transactions you you really
4:48wanna roth but you have to start out by contributing to a traditional IRA and
4:53might be non-deductible if you’re active in a plan if not it could be deductible
4:57but you don’t really care about that because you’re real intention is at some
5:01point getting it into iraq once it’s in an IRA so now you qualify for a
5:06traditional IRA contribution will you didn’t qualify for authors your income
5:10was still high now you made your say 5500 or 350 arrived at 6500 into a
5:16traditional IRA bien non-deductible traditional IRA now at any time if you
5:21want you could convert that to a Roth IRA because there are no income
5:25restrictions they are worried years ago but there aren’t anymore so you could
5:29convert that at any time to a Roth IRA now you have what you really wanted all
5:34along and that’s why people call it a workaround in the roth IRA you have that
5:39same money because you converted it but it’s different it’s not a Roth IRA
5:44contribution the money went in as a conversion which makes a difference if
5:49you’re under fifty nine and a half because if you just did a straight Roth
5:52contribution money you contribute to a Roth can always be withdrawn at any time
5:58for any reason tax and penalty free even before age 59 and a half
6:03not true with converted files so you could have a penalty if you withdraw
6:08converted funds too early but if you’re thinking of keeping it long term past
6:12fifty nine and a half and you have the five years that it shouldn’t matter ok
6:16so the question is if I opened this traditional non-deductible IRA and and
6:21want to do the conversion to give myself a Roth IRA how long do I have to wait
6:28nobody knows nobody nobody knows you know I would wait maybe a month or
6:33something but somebody i saw this on attack service over a very smart tax guy
6:37said the same thing what’s the time limit nobody knows that he said but I
6:42think it’s the same time you’ll have to wait to remarry after a spouse has died
6:48but when you feel comfortable that may be a good long time but let’s talk about
6:55some some caveats that come along with a back door IRA there are some inadvertent
7:02tax issues that you can trigger by doing this conversion let’s talk about that
7:07well one thing is you have something I don’t want to be too technical but a pro
7:12rata rule where people think if I do a non-deductible IRA and converted that’ll
7:18be a tax-free conversion not always not if you have other IRA balances and that
7:23includes set and simple I raised so you have to do a proportionate amount so
7:28could be if you have a lot of other IRA money most of that money you’re

IRA Tips for 2016

IRA Tips for 2016
7:32converting will be taxable but that’s okay too if you’re the whole idea is to
7:36get into a rut but in most cases unless you have no other I raised that
7:40conversion is gonna be either all taxable of partly taxable ok last
7:45question on this backdoor Roth IRA even though you don’t like the term
7:49ok last question though a lot of people have looked at this maneuver and but
7:54have been happy that they’ve been able to get this money over to the right
7:57column but people are concerned that Congress could close this they had so
8:03many chances to do it if that ever happened I think they have bigger fish
8:07to fry in congress that people put money into a roth remember the only money that
8:11goes into a Roth is already taxed money I think if congress opened that door
8:16they miss out on the gravy train on all that money they’re getting four people
8:20putting money at Roth IRA is because then people will think well maybe I
8:23shouldn’t convert maybe if they’re going to do this go to the next step in the
8:26next step I think you’re okay and the worst case scenario I think if they ever
8:31did something that outrageous which i think it would because so many people
8:34have
8:34and who knows how the money got him whether it was the back door could
8:39contributions of conversions they would stop putting money in Iraq and the
8:43government would be out all that tax money they’re actually counting on in
8:47their budgets now and I think worse comes to worse it would grandfather
8:50people that were in it but I don’t think that’s something to worry about but I
8:53get that question almost every consumers and the question goes something like can
8:58I trust the government to keep its word that Roth’s will always be tax free and
9:02it brings into much money you know it’s the only provision that our legislators
9:07have been looking for this kind of provision for over 200 years something
9:12that brings in money and people like it it’s never happened before I don’t think
9:17they’re gonna kill the golden goose ok thank you so much for being here lots of
9:21valuable tips for IRA contribution thanks for watching i’m Christine Benz
9:26for morningstar.com