Your 3 Question Mid-Year IRA Checkup

By Jeffery Levine, IRA Technical Expert  

Follow Me on Twitter: @IRAGuru4EdSlott

So, you make your way into the financial “doctor’s” office, armed with all of your bank and retirement account statements. What should you expect from the meeting – what burning questions should you and your financial team have the answers to? I examine the mandatory 3 questions that must be asked and answered below. 

1. Have you already made your 2014 IRA/Roth IRA contribution?
If you’re eligible to do so and haven’t already made a (full) contribution to your IRA or Roth IRA for 2014, there’s no better time to do so than now. There are countless articles that espouse the benefits of early-year contributions vs. those made later in the year – and I even made a short video on this topic for The Slott Report earlier this year – but maybe you simply didn’t have the funds to make a full IRA contribution on or close to January 1 earlier this year. That doesn’t mean that you should wait until next tax season to make a planned contribution though.

If you have the ability to make a contribution now, don’t wait. Maybe you’ve been able to sock away some free cash over the first half of the year, or maybe that tax refund finally came in … whatever the reason, if you’re able to make your contribution now, don’t wait. Sure, it would have been better if you had been able to do so on January 1, but doing so today is still much better than making your contribution at the end of this year or next year at tax time. If you can’t afford to make a full IRA contribution of $5,500 ($6,500 if you are 50 or older by the end of this year), then consider making smaller periodic contributions to your account instead. At the heart of it, it boils down to these simple well-known facts:
1) Something is more than nothing
2) Today is better than tomorrow

2. Have you considered a 2014 Roth IRA conversion?
We’re now about half-way through the year, so by this point, although some things are still bound to change, you probably have a pretty decent idea of what your income is going to look like for the year. With that in mind, you can do a little planning with your tax and/or financial advisor, or some simple calculations on your own to see if a 2014 Roth conversion may benefit you. Remember, making a Roth conversion adds income to your tax return for the year, so it will increase your current tax bill. Distributions in retirement, however, will generally be tax-free, and there are no RMDs for Roth IRAs, as there are for their traditional IRA counterparts.

Two more thoughts to keep in mind while you consider if a Roth conversion is right for you:
1) Roth conversions don’t have to be all or nothing. Partial conversions are allowed.
2) If you are unhappy with your Roth IRA conversion decision or the resulting tax bill for any reason, you can recharacterize (undo) your 2014 Roth IRA conversion anytime up through October 15, 2015.

3. Are you aware of all the new rules that may (or may not) affect you?
If there’s one thing constant in the IRA world, it’s change. It seems that nearly every year there are new rules that phase in and others that phase out. On top of all of that, there are always court decisions, IRS rulings and other guidance that reshape the retirement account landscape. Some of the key developments that have occurred over the last year are:

1) The provision for qualified charitable distributions (QCDs) expired at the end of 2013 (although there’s a good chance Congress will renew it at some point, retroactively, for all of 2014)

2) In June of 2013, the United States Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA) as unconstitutional. As a result, many same-sex couples are now considered married for federal income tax purposes. This includes the IRA rules.

3) In January of 2014, the Tax Court issued a landmark decision in Bobrow, in which it ruled the once-per-year IRA rollover rule applies in aggregate to all of a person’s IRAs. IRS has said it will begin enforcing this decision as early as January 1, 2015.

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