IRAs are a valuable retirement planning tool, but misconceptions can lead people to not take full advantage of them. Below we review some of the common IRA myths.
Myth #1: You invest in an IRA.
This myth is really a matter of semantics. People often talk about investing in an IRA, but that’s not quite right. An IRA is a type of account that receives special tax treatment. Once you open the account, you choose specific investments.
Myth #2: I can’t contribute to my IRA and 401(k) plan at the same time.
There is no prohibition against saving money in both your 401(k) plan and IRA during the same year. As a general rule, you can contribute up to $18,000 to a 401(k) and $5,500 to an IRA in 2015 and 2016, plus catch-up contributions of $6,000 and $1,000 respectively, if you are age 50 or over. However, if your income exceeds certain limits, your IRA contribution may not be fully deductible, though you can still make nondeductible contributions to your account. Also, if you make more than $193,000 if married or $131,000 if single in 2015 ($194,000 and $132,000 respectively in 2016), you aren’t eligible to make contributions to a Roth IRA.
Myth #3: My 401(k) plan alone will be enough for retirement.
Saving in a 401(k) plan is an important first step to preparing for retirement (and is especially important if your employer matches a portion of your contributions), but it may not be enough. Even if you max out your 401(k) savings, that may not generate the income you need in retirement. Contributing to an IRA on top of your 401(k) plan can create additional retirement security and may be especially important if you have a high income or had a late start on saving in the first place.
Myth #4: I can’t deduct my IRA contributions, so it’s not worth contributing at all.
As mentioned above, once you reach a certain income level, you can no longer deduct your IRA contributions from your federal income taxes. That may discourage some people from contributing at all. But even contributions you can’t deduct can be a valuable source of retirement savings. Even if you’ve lost your ability
to contribute to a traditional IRA, you may still be able to contribute to a Roth IRA. Money placed in a Roth
IRA isn’t deductible in the year you contribute, but earnings grow tax free, giving you a tax-free source of retirement income.
Myth #5: I make too much money to contribute to a Roth IRA.
As we outlined above, higher-income individuals lose their ability to make direct contributions to a Roth IRA. But there’s a way around those restrictions. It’s called a backdoor Roth IRA; here’s how it works. In 2010, the IRS relaxed IRA conversion rules allowing anyone, regardless of income, to convert a traditional IRA to a Roth IRA. You simply make nondeductible contributions to an IRA and then roll those contributions into a Roth IRA. One catch: For tax reasons, this strategy works best if you don’t already have money in a traditional IRA.
Myth #6: It doesn’t matter who you name as a beneficiary for your IRA.
You may think that if you have a will or other estate planning documents in place, you don’t need to pay much attention to the names on your IRA beneficiary forms. That’s a misconception that can cause serious problems for your heirs. Why? Because beneficiary designations override your will. Even if you leave your entire estate to your wife, if your children from a previous marriage are listed as your IRA beneficiaries, they’ll receive those assets. That’s why it’s important to regularly review your beneficiary designations and make sure they’re in line with your overall estate plan.
Please call if you’d like to discuss this in more detail.