Tax Tips for Nurses: IRAs

Nurses spend their entire working careers caring for the needs of others and tend to neglect important planning for themselves. According to a Fidelity Investments® Money FIT Nurses Study, more than half of nurses surveyed (56%) say they lack confidence in making financial decisions. The more educated you are about financial planning and investing, the more empowered you will be to control your financial future.

When setting up long-term financial goals, consider including other sources of income that may be available to you, such as Social Security benefits, trusts, or other savings accounts. An IRA is a great place to start saving for the long haul.

There are both opportunities and pitfalls for IRA owners. IRAs come in two varieties: the traditional and the Roth. The conventional generally provides a tax deduction for a contribution and tax-deferred accumulation, with taxable distributions. On the other hand, there is no tax deduction for making a Roth contribution, but the distributions are tax-free.

So, it leaves you with a significant decision. If you can afford to make the contributions without a tax deduction, then the Roth IRA is the better choice in most circumstances. However, some high-income restrictions limit the deductibility of a traditional IRA and the ability to contribute to a Roth IRA.

Pitfalls – Here are some of the pitfalls that can be encountered by nurses with IRAs:

• Early withdrawals– the government designed IRAs to be retirement resources. To deter individuals from tapping these accounts before retirement, they added an early withdrawal penalty of 10% of the taxable amount of the IRA distribution. The penalty applies for distributions made before age 59-½, but some exceptions exist.
  
  
• Excess contributions– The tax code sets the maximum amount that can be contributed to an IRA annually. Contributions above those limits are subject to a nondeductible 6% excise tax penalty, and this penalty continues to apply each year until the over-contribution is corrected.
  
  
• Multiple rollovers– A rollover is where you take possession of the IRA funds for some time (up to 60 days) and then redeposit the funds into the same or another IRA. Only one IRA rollover is allowed in 12 months, and all IRAs are treated as one for purposes of this rule. Suppose more than one rollover is made in 12 months. In that case, the additional distributions are treated as taxable distributions, and the rollover is treated as an excess contribution, causing significant tax and penalties. Rollovers can be avoided by directly transferring assets between IRA trustees.
  
  
• No Traditional IRA contributions in the year reaching age 70½– Individuals cannot make a Traditional IRA contribution in the year they reach the age 70½ or any year after that. This rule doesn't apply to Roth IRAs. Contributions to a traditional IRA made in the year you turn 70½ (and for subsequent years) are treated as excess contributions and are subject to the nondeductible 6% excise tax penalty until corrected.
  
  
• Failing to take a required minimum distribution (RMD)– Individuals with traditional IRA accounts must begin taking RMDs in the year they turn 70½ and each year after that. However, the distribution for the year an individual reaches age 70½ can be delayed to the next year without penalty if the distribution is made by April 1 of the following year. Failing to take a distribution is subject to a fine of 50% of the RMD. The IRS will generally waive the penalty for non-willful failures to take the RMD, provided the individual has a valid excuse, and the under-distribution is corrected. The RMD rules don't apply to Roth IRAs while the owner is alive.

Opportunities - Here are some of the opportunities that can present themselves to nurses with IRAs:

• Late contributions– If you forgot to make an IRA contribution or just decided for the prior year, the tax law allows you to make a retroactive contribution in the subsequent year, provided you do so before the unextended April filing due date. For example, you can make an IRA contribution for 2018 through April 15, 2019. This is also a benefit for taxpayers who were not previously sure they could afford to contribute.
  
  
• Switch the type of IRA– If you make an IRA contribution for a year, tax law allows you to switch the designation of that contribution from a traditional IRA to a Roth IRA or vice versa, provided you do so before the unextended April filing due date.
  
  
• Backdoor Roth IRA– Contributing to a Roth IRA is not allowed if the individual's modified adjusted gross income (AGI) exceeds a specified amount based on filing status. For example, the limits for 2019 are $203,000 if filing a joint return, $10,000 if filing married separately, or $137,000 for all others. If a high-income taxpayer would like to contribute to a Roth IRA but cannot because of the income limitation, a workaround will allow the high-income individual to fund a Roth IRA. Here is how that backdoor Roth IRA works:
  
  
  1. First, a contribution is made to a traditional IRA. A traditional IRA is allowed but not deductible for higher-income taxpayers participating in an employer-sponsored retirement plan. Even if all or some portion is deductible, the contribution can be designated as not deductible.
     
     
  2. Then, since the law allows an individual to convert a traditional IRA to a Roth IRA without any income limitations, the nondeductible traditional IRA can be converted to a Roth IRA. Since the traditional IRA was nondeductible, the only tax related to the conversion would be on any appreciation in the value of the traditional IRA before the conversion is completed.
     Investment counselors and taxpayers often overlook one potential pitfall to the backdoor Roth IRA that could result in an unexpected taxable event upon conversion. For distribution or conversion purposes, all of your IRAs (except Roth IRAs) are considered one account, and any distribution or converted amounts are deemed taken ratably from the deductible and nondeductible portions of the traditional IRA. The part that comes from the deductible contributions would be taxable. So, the conversion tax implications should be considered before employing the backdoor Roth strategy.
     
     
• Alimony as compensation – To contribute to an IRA, an individual must receive "compensation." For IRA purposes, compensation includes taxable alimony received. Thus, for purposes of determining IRA contribution and deduction limits, individuals who receive taxable alimony and separate maintenance payments may treat the alimony as compensation for purposes of making either a traditional or a Roth contribution, allowing alimony recipients to save for their retirement.
  
  
• Spousal IRA– One frequently overlooked tax benefit is the "spousal IRA." Generally, IRA contributions are only allowed for taxpayers who have compensation (the term "compensation" includes wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working or low-earning spouse to contribute to their own IRA, otherwise known as a spousal IRA, based upon their spouse's compensation (as long as it is enough to support the contribution).
  
  
• Saver's credit – For low- to moderate-income taxpayers, the saver's credit helps offset part of the first $2,000 an individual voluntarily contributes to an IRA or other retirement plans. The saver's credit is available in addition to any additional tax savings from contributing to an IRA or retirement plan. Like other tax credits, the saver's credit can increase a taxpayer's refund or reduce the tax owed. The maximum saver's credit is $1,000 ($2,000 for married couples if both spouses contribute to a plan). The application of this credit is minimal. Please call for additional details.
  
  
• IRA-to-charity direct transfers – Individuals aged 70½ or over must withdraw annual RMDs from their IRAs. These folks can take advantage of a tax provision allowing taxpayers to transfer up to $100,000 annually from their IRAs to qualified charities. This provision may provide significant tax benefits, especially if you would be making a large donation (although it also works for small amounts) to a charity anyway. Here is how this provision, if utilized, plays out on a tax return:
  
  
  1. The IRA distribution is excluded from income;
     
     
  2. The distribution counts toward the taxpayer's RMD for the year; and
     
     
  3. The distribution does NOT count as a charitable contribution.
     
     

At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer with itemized deductions will lower their AGI, which will help with other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses, passive losses, and taxable Social Security income. In addition, non-itemizers benefit from a charitable contribution to offset the IRA distribution.

Suppose you want to make sure you're maximizing your retirement investment results. In that case, Prosperity Financial Solutions is here to help nurses with their tax planning needs and develop an IRA distribution plan unique to their circumstances.

Nurses are the backbone of our society, and we recognize and appreciate your vital work. That's why we have made it our mission to provide nurses with tailored wealth management services that fit their unique needs. Our team of experts understands the challenges you face professionally and personally. We are committed to providing sound advice and guidance to help you achieve your financial goals.

Book your complimentary call or appointment with Prosperity Financial Solutions today.