Carnegie Investment Counsel Blog

Understanding IRAs to Maximize Your Options in Retirement

Posted by Bryan Blackburn, CFP® on May 7, 2020 11:30:00 AM

Understanding IRAs to Maximize Retirement

Individual retirement accounts (IRAs) are tax-advantaged savings plans designed to assist people in funding their retirement. Created by an act of Congress in 1974, these accounts became significantly more popular following another government act in 1981 that allowed all working taxpayers to establish IRAs.

While a 401k account is an investment vehicle that employers typically offer to help their employees save for retirement, IRA accounts are opened mainly by individuals, which can include the self-employed and small business owners. 


What are the amounts I can contribute to an IRA?

In the decades that followed, limits to the amount of money that could be directed to an IRA were expanded several times. Initially set at $1,500, the Traditional IRA or Roth IRA contribution limit for the 2019 tax year is $6,000, or $7,000 if you are 50+ years old. Additionally, there has been a broadening in the alternative types of IRA accounts available, which have higher contribution limits.


What are the advantages of an IRA?

In general, the most significant advantage to an IRA account is that it allows your retirement assets to grow over time without tax consequences. The purpose of this article is to help you understand the various types of IRAs in the marketplace and how these accounts can best suit your individual needs.


What are the primary IRA types?


1. Traditional IRA

The most common form of IRA available today is the traditional IRA. It can be used in conjunction with an employer-sponsored retirement plan (pension or 401k) or as the sole vehicle for your retirement. Contributions to Traditional IRAs may be tax-deductible, and you can defer paying income tax on the earnings until you withdraw the funds.

If you are an active participant of an employer-sponsored retirement plan, then the deductibility of your IRA contributions is subject to the following Modified Adjusted Gross Income (MAGI) levels:


$64,000 - $74,000

Married Filing Jointly

$103,000 - $123,000

Married Filing Separately

$0 - $10,000

Non-active participant married to active participant

$193,000 – $203,000

Make sure you know whether your traditional IRA contribution is deductible or not for tax purposes.

2. Roth IRA

Created in 1997, Roth IRAs differ from traditional IRAs in that money contributed to these accounts has already been subject to income tax. However, Roth IRAs grow tax-free and can be withdrawn without tax implications.

While the contribution limit is the same as Traditional IRAs ($6,000, or $7,000 if you are 50+ years old), your eligibility to contribute is income dependent. For joint filers in the 2019 tax year, you may make a full contribution if your modified adjusted gross income (MAGI) is less than $193,000. You can contribute a reduced amount if your income is under $203,000. People filing jointly who make $203,000 or more are not eligible to contribute to Roth IRAs.

Unlike with the traditional IRA, you may withdraw your contributions to a Roth IRA tax-free and without penalty at any time, for any reason. Earnings are subject to taxation upon distribution and a potential penalty if distributed early, depending on your circumstances. If you don't mind the tax hit on the front end, the increased flexibility that the Roth provides may be an excellent choice for you. If your circumstances warrant an early withdrawal of the Roth earnings as well, you should consult with your advisor to find out potential penalties and taxation.

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Simplified employee pension (SEP) plans are somewhat different from the more widely used examples above. These accounts are employer-initiated and allow business owners to contribute toward their employees' retirement as well as their own retirement. Only employer contributions are made to SEP-IRA accounts for each employee, and they follow the same withdrawal rules as traditional IRAs.

These accounts work well for those who are self-employed, own a small businesses or anyone who has freelance income. Contributions are tax-deductible(there's no option for post-tax or Roth contributions).. Individual employees may not contribute to the account as the employer makes all contributions.

One of the major differences for the SEP-IRA is the significantly higher contribution limits. For 2019, contributions to each employee's account may not exceed the lesser of 25% of compensation or $56,000. The same contribution limit applies to self-employed individuals, the lesser of 25% of their net income or $56,000.


A savings incentive match plan for employees (or SIMPLE) IRA, is another option for some. It is also a traditional IRA designed for small businesses and the self-employed. Limited to companies with 100 or fewer employees, it works well for entities that are creating a start-up retirement savings plan. The reason for this is that administrative and start-up costs are lower than a conventional retirement plan like a 401k.

Contributions to SIMPLE IRAs are pre-tax, and the earnings grow tax deferred. In other words, you will have to pay income taxes upon withdrawing funds from the account in the future.

SIMPLE IRAs are differentiated from SEP-IRA plans because they allow employees to make their own contributions, and employers are required to contribute on the employee's behalf. In 2019, employers are required to match up to 3% of the employee's compensation or 2% of the employee's compensation if the employee doesn't contribute. The employee contribution limit is $13,000, with a catch-up provision for those aged 50+ of an additional $3,000.


Understanding IRA Options 

When choosing IRA accounts, consider how the various types of accounts impact you and your family both during the working years and in retirement. It is essential to take advantage of the tax benefits that Congress has created, and the IRS code affords us. Setting as much money aside today that can grow on a tax-advantaged basis will make a big difference in the amount of retirement assets you have in the future.



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Topics: Financial Planning

Bryan Blackburn, CFP®

Written by Bryan Blackburn, CFP®

Bryan Blackburn serves as Financial Planner and Wealth Advisor. As a CERTIFIED FINANCIAL PLANNER™, he manages relationships for select clients. Bryan provides holistic financial planning advice; including retirement planning, cash flow analysis, tax planning, education funding, and estate planning and investment analysis. Working in tandem with a Carnegie Portfolio Manager, he is able to provide comprehensive wealth management solutions for clients.

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