Individual Retirement Accounts (IRAs) were created by the Employee Retirement Security Act of 1974 (ERISA). Since that time, IRAs have undergone considerable change, although the Tax Cuts and Jobs Act of 2017 didn’t introduce any new rules. Still, you may not fully appreciate the importance that IRAs can have to you and your staff or some of the pitfalls that could apply.
Things Business Owners Should Know
Here are 10 things business owners should know about IRAs:
1. It’s Easy to Increase Retirement Savings
If your business doesn’t have a qualified retirement plan, it goes without saying that you probably should be putting money into a personal IRA each year. If you have a spouse who doesn’t work outside of the home, you can also contribute to an IRA for your spouse. While the contribution limit for an IRA is modest (currently $5,500, plus $1,000 for those age 50 or older by year end), over time the savings plus the tax-deferred earnings add up considerably. For example, a person puts in $5,000 each year starting at age 40. After 25 years, contributions total $125,000; with just a 7 percent annual return, the savings would amount to over $338,000. At 10 percent, the balance would be nearly half a million dollars!
If your business has a qualified retirement plan, you can still add money to an IRA, but only if your modified adjusted gross income (MAGI) is below set limits. Check out the MAGI limits for 2017 and 2018.
2. Age Matters
You can only add money to an IRA if you are under age 70½ at the end of the year. This is so even if you are still working. But if you’re past the age limit while your nonworking spouse is not, you can still add funds to his/her IRA with your earnings from a job or self-employment.
3. Consider Tax Deduction Now Versus Tax-free Income Later
Decide whether you want the tax deduction for a contribution now through a traditional IRA or tax-free income from a Roth IRA funded with after-tax dollars. In making this choice, factor in your savings time frame, tax bracket and income limits for contributors with what you know now (you can project but can’t be certain about the future). For example, if your income is too high, you are barred from making Roth IRA contributions.
4. Payroll Deduction IRAs Help your Staff
If your business doesn’t have a qualified retirement plan, you can help employees save for retirement through a payroll deduction IRA. They set up their accounts; you withhold funds from their paychecks and deposit them in their IRAs.
5. Certain Investments are Barred
Most IRA owners invest their savings in publicly-traded stocks, bonds, mutual funds, exchange traded funds and bank certificates of deposit. But if you use a self-directed IRA, you can have other types of investments, including gold and silver bullion. However, no investments can be made in collectibles, and there are considerable restrictions on investments in real estate and closely-held businesses. What about bitcoin? The IRS hasn’t said yes or no yet.
6. Certain Investments Trigger Annual Taxes
Generally, income from a deductible IRA is tax deferred; it isn’t taxed until distributions are taken. But if an IRA holds certain master limited partnerships (MLPs), there may be current tax. The MLP issues a Schedule K-1 to the IRA; the owner picks up the income reported on the K-1 on his/her personal return. However, no losses reported on the K-1 can be taken currently by the IRA owner.
7. RMDs Can’t be Delayed for Working
Once you reach age 70½, you must begin to take required minimum distributions. This is so even though you’re still working.
8. Tax-free Transfers can be Made to Charity
When you reach age 70½, you can make direct transfers from an IRA to a public charity each year up to $100,000. The amount transferred counts toward RMDs but isn’t taxed. However, no charitable contribution deduction is allowed. After 2018 when more individuals will be using the increased standard deduction and won’t care about not deducting charitable contributions, this transfer option likely will become even more attractive.
9. Loans are not Allowed
While qualified retirement plans can permit participants to take loans from their accounts, IRAs cannot. If a loan is taken, the account loses its tax-exempt status and the entire balance becomes taxable to the owner. However, if funds are withdrawn and replaced within 60 days, the IRA remains intact and no taxable distribution results.
10. Tax Rules for IRAs are Unchanged
Again, the Tax Cuts and Jobs Act made major changes in the tax rules … but not for IRAs. The ability to deduct IRA contributions or make after-tax contributions to Roth IRAs has not been changed.
Conclusion
For more about IRAs, see IRS Publications 590-A (for putting money in) and 590-B (for taking money out). If you have questions, talk to your CPA or other financial advisor.
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