The earlier you make your IRA contributions, the longer they will grow. So, under that theory, you should have made your IRA contributions for tax year 2023 at the beginning of 2023. However, not everyone has the luxury of having the money ready to invest right away. Fortunately, it’s still not too late. You have until April 15, 2024, to make that contribution. You may make your contribution for the 2024 tax year at any time.
The contribution limit is $6,500 for the 2023 tax year. However, if you are 50 or older, an additional $1,000 “catch-up” contribution is allowed, bringing the total to $7,500 for those individuals. The basic limit was raised to $7,000 for the 2024 tax year, and $8,000 with the catch-up contributions.
This may not seem like a lot of money, especially when it comes to retirement. However, tax-deferred investment returns really add up, when given enough time to grow. Using Arvest’s traditional IRA calculator, we can see a simplified example of an IRA where you’re adding the current maximum of $7,000 per year for 30 years with an 8% rate of return. Using this example, you’ll have contributed $210,000 in capital over those years, but the account would have grown to $856,420.97.
What kind of IRA contribution to make?
The contribution limit applies to Roth IRAs and traditional IRAs—some contributions to each are also permitted, so long as the total contribution amount doesn’t exceed the annual limit. The underlying question is – when should taxes be paid on the retirement income? With a traditional IRA, taxes are deferred on the income that is contributed, but are paid when the money is distributed.
This suggests that those who are currently in the higher tax brackets may have a greater advantage with the traditional IRA, assuming they will be in a lower tax bracket in their retired years.
On the other hand, when income taxes on the Roth IRA are paid upfront, then the withdrawals come out tax-free in retirement (a tax penalty could apply for either approach with an early withdrawal before age 59 ½). The tax-free growth is a great incentive, unless one would have to contribute less than the maximum without the tax adjustment.
Consider your beneficiary designations.
Have circumstances changed since you specified a surviving beneficiary for your IRAs? Has there been a death, a birth, a marriage or a divorce? You might be surprised how often IRA designations are overlooked during a significant life change.
A substantial increase in wealth may also be an occasion to change an IRA designation. For example, if a surviving spouse will no longer need the IRA for retirement security, it may make sense to tap the IRA for charitable bequests. Such a move may save on estate taxes, inheritance taxes, and income taxes after death.
The IRA beneficiary designation needs to be reviewed in the context of the overall estate plan. IRAs may be subject to estate and inheritance taxes, and distributions from inherited IRAs (but not inherited Roth IRAs) may be subject to income taxes as well. All these taxes can eat up this asset pretty quickly, so thoughtful planning is a must.
If you are still in the contribution phase of your IRAs, make sure to do a quick double-check on the beneficiary each year. An Arvest Trust Officer can help walk you through this process or answer questions as you evaluate your overall estate plan. Account minimums may apply for fiduciary services through Arvest’s Trust Division.
How do my IRAs fit into the rest of my financial picture?
Another question to consider every year when making a contribution is how these investments fit within the entire portfolio, including 401(k) accounts and taxable savings. You want to have one asset allocation plan for all of your holdings, not a separate plan for every account.
Having multiple accounts does not provide you with investment diversification if all the accounts are invested the same way. You may achieve some tax diversification (such as having a traditional 401(K) and a Roth IRA), but that’s only one type of diversification most people are looking for.
Am I keeping track of everything, or am I forgetting something?
As we shift in life through different jobs and financial institutions, we can end up with many different IRAs to manage.
Consolidation of your IRAs into a single account could simplify your financial life. You’ll have just one statement to contend with, and one account to review for investment decisions, which could help make answering all the questions above a bit easier. Maintenance fees may be reduced as well.
The consolidation process does not need to be complicated. An Arvest Wealth Management client advisor would be happy to help if you wish to take this step. We could also do a holistic review of your IRAs in the context of your entire portfolio. Let us know if you’d like to learn more.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
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Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax