David Salazar May 4th 2019 Wealth MODs 101

• Wealth MODs 101
• Traditional IRA MOD 2019

There are many investment and savings vehicles out there that are designed to help you prepare for one of the most challenging financial goals you can have - retirement. You can save all your money into a checking account, savings account, a Certificate Deposits (CDs) or even putting all your hard earned cash under a mattress but that is not recommended. However, there is an investment vehicle that has extraordinary tax benefits:

Traditional IRA

The Individual Retirement Account or IRA is like a cousin to the 401(k). It’s a portable retirement account that is not associated with an individual’s employer. A Traditional IRA is an account that offers similar tax advantages to those of a 401(k).

Here are the essential features of a Traditional IRA:

• The only person that can contribute and own an IRA is yourself. Both you and your spouse may each have one but not share it.
• Anyone with Earned Income is eligible to contribute to a Traditional IRA regardless of how much you make.
• For 2019, you can contribute a max of $6,000. If you are older than 50, you can contribute up to $7,000.
• Contributions are tax-deductible; in laymen terms, you can “write-off” these contributions as expenses, thus lowering your taxable income.
• The growth of the contributions are tax-deferred, meaning you won't be taxed unless you withdraw them.
• Withdrawals from Traditional IRAs are taxed as ordinary income.
• Early Withdrawals have a 10% tax penalty unless you meet certain conditions.
• There is a Required Minimum Distribution at 70 1/2. It's time to pay your taxes.

Traditional IRAs are a great investment vehicle when it comes to saving for retirement, especially for individuals that are looking for that last minute tax-break. This is true if you are in the accumulation phase of your life because at some point, you will reach the peak of your earning income years and you will be in a high tax-bracket. Once you reach your preservation phase of life - retirement, you will most likely be in a lower tax bracket. Hence when you withdraw from your Traditional IRA account; you will minimize the tax burden. Unlike the Roth IRA, you can always contribute the full amount ($6,000 or $7,000 depending on age) regardless of how much money you make. However, there are Traditional IRA Qualifications and Deduction Limits.

Deduction Qualifications

The ability to deduct your contributions from a Traditional IRA will typically hinge on your income and participation in your employer’s retirement plan.

You can fully deduct all your contributions if:

• Married and both you and your spouse do not participate in a retirement plan through your employer.
• Single and you do not participate in a 401(k) or any retirement plan through your employer.

You can partially deduct your contributions if:

• If either you or your spouse participates in a retirement plan from your employer and the amount that can be deducted depend on your MAGI (Modified Adjusted Gross Income).
• The table below has a full breakdown of the Traditional IRA income limits based on your MAGI (Modified Adjusted Gross Income).

Traditional IRA Deduction Income Limits For 2019

Things To Consider

• Required Minimum Distributions (RMDs) – Remember, Traditional IRAs are tax-deferred (you pay taxes later) that is the day when Uncle Sam says “enough is enough, it’s time to pay your taxes.” The IRS requires you take out a minimum amount at the end of every year starting on April 1st of the year following the year you turn 70½.
• Withdrawal Penalties – You can withdraw money from your account, whether it's from your contributions or gains, without incurring a tax penalty after the age of 59 ½. If you withdraw before the tender age of 59 ½, you are subject to a 10% penalty tax. However, there are certain exceptions that you may qualify for to waive the penalty if you decide to withdraw due to these reasons:
• You are disabled
• First home purchase (up to $10,000 max)
• Post-secondary education expenses
• Certain medical bills
• You are unemployed for at least twelve weeks, and you need to make insurance premium payments

Conclusion

As you can see, the Traditional IRA account has far more upsides than downsides. However, you must always do your due diligence when deciding if a Traditional IRA will benefit you. We have compiled the pros and cons of having a Traditional IRA account to summarize:

The most significant caveat of all is that fact that you have to select the investments that go to the account. People always tend to forget or don’t realize that IRA Accounts are just buckets that hold investments (Stocks, Bonds, ETFs, Mutual Funds, CDs, etc.), not an investment itself. There is a multitude of factors that go into the decision-making process of choosing the right investment that is good for you:

• Obtaining and understanding your capacity to take risk and your emotional tolerance to risk. Also known as your risk profile.
• Diversifying between the right mix of investments (Stocks, Bonds, ETFs, Mutual Funds, CDs, etc.). Also known as asset allocation.
• Having a real financial plan. Whether it's figuring out when to rebalance, how often to contribute, assigning beneficiaries, when to make asset allocation changes or having a contingency plan.

Rightfully choosing the right investments takes a substantial amount of planning. If you don’t have time or you are unsure about how to even begin, get in touch with your Financial Advisor to help you out with your current situation or feel free to reach out for tailored advice.

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