Knowing What Counts Podcast

Mastering IRAs: Beyond the Basics

• Tim Provost, CPA • Episode 18

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Let’s Talk IRAs: What They Are and Why They Matter- Kelly Braese Senior Tax Associate

Navigating the complex world of retirement planning can feel overwhelming, but understanding IRAs might be the key to unlocking your financial future. In this information-packed episode, Kelly Braese, Senior Tax Associate at MP CPAs, demystifies the power and potential of Individual Retirement Accounts as wealth-building tools that go far beyond basic retirement savings.

Kelly breaks down the fundamental differences between IRAs and employer-sponsored plans like 401(k)s, highlighting the greater flexibility, investment options, and portability that IRAs offer. The conversation explores the critical distinctions between traditional and Roth IRAs – from tax treatment and contribution limits to withdrawal rules and required minimum distributions. For those weighing their options, Kelly provides clear guidance on how each account type might benefit different financial situations and future goals.

The episode doesn't stop at basics. Kelly dives into specialized IRA options for self-employed individuals and small business owners, including SEP IRAs with their impressive $70,000 annual contribution limit and SIMPLE IRAs with employer matching requirements. She also reveals strategic planning techniques like the "backdoor Roth" conversion that allows high-income earners to access Roth benefits despite income limitations. Whether you're just starting your retirement planning journey or looking to optimize existing accounts, this episode delivers actionable insights to help maximize your long-term wealth while minimizing tax burdens.

Wondering which IRA is right for your specific financial situation? Connect with the expert team at MP CPAs by visiting TheMPGroupCPA.com or calling 413-739-1800 to develop a personalized strategy that aligns with your goals. After all, as we always say, success begins with Knowing What Counts.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Speaker 1:

Welcome to the Knowing what Counts podcast, the place where expert guidance meets smart financial decisions. Whether you're a high net worth individual or a thriving business, the experts at MPCPAs are here to help you protect and optimize your wealth. Let's get started, because success begins with Knowing what Counts. Because success begins with knowing what counts.

Speaker 2:

Brays are more than just retirement accounts. They're powerful tools for building long-term wealth and minimizing taxes. Kelly breaks down their types of benefits and strategic uses. Welcome back everyone. I'm Sofia Yvette, co-host and producer, back in the studio today with Kelly Brace, senior tax associate at MPCPAs. Kelly, how's your day been so far? It's been great. How's yours? It's been great. Thank you so much for asking. So. Kelly, can you introduce yourself to the listeners and discuss your role at the firm?

Speaker 3:

Yeah, so my name is Kelly Brace and I am currently a senior tax associate with the firm. I started here as an intern about three years ago and have been enjoying it ever since.

Speaker 2:

Amazing. Now let's get into it a bit more. Can you explain what an IRA is and how it is different than any other retirement accounts?

Speaker 3:

So an IRA is an individual retirement account. It's similar to a 401k that some people might be more familiar with. However, an IRA is not sponsored by your employer and it can be started by an individual, all on their own. The contribution limits differ between a 401k and an IRA. 401k investment options are typically limited to whatever the plan offers, but with an IRA, there's much broader range of investment options. A 401k has different rules on distributions than an IRA does.

Speaker 3:

Both 401ks and IRAs have penalties for early withdrawals before the age of 59 and a half, but IRAs offer a few exceptions to avoid these penalties. One example might be that you can take out for first-time homebuyers. Iras are also more portable and stay with you, whereas a 401k remains with your employer when you leave, unless you choose to roll it over into a new plan. And another difference is that typically there's only the traditional and Roth 401ks, whereas there can be various types of IRAs. Some examples of the various types of IRAs are traditional IRAs, the Roth IRA, you can have a SEP IRA, a simple IRA, and spousal and custodial IRAs.

Speaker 2:

IRAs.

Speaker 3:

Wow, now I hear a lot about traditional IRAs and Roth IRAs. What are the main differences between them? So a traditional IRA typically the way they work is that it defers the tax by getting a deduction on your tax return for the contribution that you make. This essentially makes it a pre-tax, even though you used post-tax money to make the contribution. When you take these distributions, you'll get taxed on the income and any earnings at that time. Typically, there's no income limit to these contributions. However, there is an income limit to getting the deduction. Therefore, when you make a contribution and don't qualify for the deduction, you will have to track these contributions on your tax returns as a basis in the IRA so that you're not taxed on the amount when you take the distribution out.

Speaker 3:

One thing to note about the traditional IRA is there is also a required minimum distribution that an individual must start taking at the age of 73. That is, if you're turning 73 in 2025. This age typically changes for the year and then, additionally, with a Roth IRA, a contribution is usually made with post-tax dollars. Thus, when the distributions are later taken from the account, there's no tax on that income because it was already taxed before you contributed the income. And again, the earnings also tend to be tax-free, which is a key benefit to making Roth IRA contributions. There are also contribution limits, or income limits, to making these contributions, just like the traditional. One thing that is a major difference is a Roth IRA does not have a required minimum distribution, unlike its traditional IRA. Both of these IRA types have a contribution limit of $7,000, and if you're over the age of 50, you get an additional $1,000 to that seven, which makes $8,000 of a contribution limit.

Speaker 2:

Now, can anyone contribute to these types of IRAs?

Speaker 3:

Yes, essentially, anyone can make contributions to these types of IRAs, but you must have earned income in order to do so. There is no income limitation for the traditional IRA, although there can be limitations if you also make contributions to a workplace retirement plan. For Roth IRAs, there is a modified adjusted gross income limitation in order to qualify for making contributions. Those modified adjusted gross income limitations are you must make less than $150,000 a year if you are single and less than $236,000 a year if you're married filing joint.

Speaker 3:

Alternatively, some options if you do not have earned income but your spouse has earned income is a spousal IRA. These IRAs allow a working spouse to contribute to an IRA on behalf of the non-working spouse. This would eliminate the limitation of that spouse having earned income in order to open an IRA, because they can use the earned income of the other spouse. In order to qualify for this, you must be married filing joint. Second to that is a custodial IRA, and this IRA are open for a minor or dependent and is managed by a custodian until the child reaches a majority age. The minor must still have earned income in order to qualify.

Speaker 2:

Now what if you are self-employed? Are there any IRA options for you?

Speaker 3:

Yes, if you're self-employed, Are there any IRA options for you? Yes, if you're self-employed, there's a couple of options for IRAs for you. First, we have a SEP IRA. This is a traditional IRA for self-employed individuals or small business owners. This is employer-funded only and, as the self-employed person, you are both the employer and the employee, and, as the self-employed person, you are both the employer and the employee, so you, as the employer, can make a contribution. This increases your contribution limitations, so you can contribute up to the lesser of 25% of compensation annually, or $70,000 in 2025. Another option is the Simple IRA. This is a retirement plan for businesses with 100 or less employees. Both the employer and the employee can contribute. This is a lower contribution limit than the 401k, but this is higher than the traditional IRA. One thing to note is that there is a mandatory employer match, which is up to 3% of the employee's compensation, and the employee contribution limit on a simple IRA is $16,500 for 2025.

Speaker 2:

Now, what are the rules and tax implications when withdrawing from these IRAs?

Speaker 3:

what are the rules and tax implications when withdrawing from these IRAs? So some of the rules and tax implications for the traditional IRAs are that the distributions can start to be taken at age 59 and a half without facing any penalties on doing so. One tax implication for the traditional is that you have to take the required minimum distribution, which is often referred to as an RMD. This is due to the tax deferment. Traditional IRAs have the RMD. Since you deferred the tax, typically the IRS wants you to eventually make a payment for those taxes. All of these distributions are taxed at ordinary rates. For a Roth IRA, the first distributions can also be taken at 59.5. When the account has been open for at least five years and the individual reaches that age of 59.5 years old, the distributions are tax-free. And the other thing to note, as mentioned before, is there are no RMDs for Roth IRAs.

Speaker 2:

Now what if someone already has another retirement, such as a 401k? How does that impact contributing to an IRA?

Speaker 3:

So that can be a little bit tricky, but you can absolutely contribute to both of those types of accounts. However, there could be limitations on the deduction of the traditional IRA, depending on your income level. If you'd like to move your retirement from a 401k to an IRA, this would be ideal for you. This would roll the funds from one account to another without triggering taxes or penalties. This preserves the tax-deferred status at the same time and there's more freedom with investment choices compared to the employer plan limitations. One thing to note is that this can only be done once every 12 months, so once a year, if you will.

Speaker 3:

Some people might work for an employer with a 401k and also have self-employed income, so you can contribute to a 401k and a SEP IRA, but there are limitations. 401k and a SEP IRA, but there are limitations. If the SEP and the 401k are related to the same employer, then the total combined contributions of the SEP and the 401k cannot exceed the $70,000. Essentially, you cannot double dip into both of these retirement account contributions. However, if the 401k and the SEP are completely different employers, then you don't have that cap. So just think that the cap is per employer, not individual.

Speaker 2:

Now what are some planning strategies around IRAs?

Speaker 3:

So, as I mentioned before, people have certain income levels that cannot contribute to these Roth IRAs. However, there's a loophole allowing such a contribution. That's typically called the backdoor Roth. This allows high income earners who exceed Roth IRA income limits to contribute to a Roth IRA. First you would contribute to a non-deductible traditional IRA and then convert that contribution to a Roth IRA. One thing to note is this should be done soon after the contribution in order to avoid taxable earnings on the account. It can be a little tricky if you already have other traditional IRA accounts that have been around for years, because your contributions go into one big bucket and when you roll, some of it would be considered taxable earnings. Typically, someone would open a backdoor Roth, which would be your traditional IRA account. They set up this empty account, they contribute their non-deductible IRA amount to it and then roll it over to the Roth and the traditional account would go back to zero, and you could do this once every 12 months, like the other rollovers.

Speaker 2:

Now, if someone is unsure which IRA is right for them, which do they do?

Speaker 3:

This is a very complicated area and it can differ in outcomes depending on what your desires are and what your income levels might be. So if someone's unsure what IRA is right for them, it is always a good idea to reach out to your financial advisors and or your tax accountants for any advice. We'd always be happy to help.

Speaker 2:

Amazing. Well, Kelly, thank you so much for sharing those insights with us. We'll catch you next time. Have a great rest of your day.

Speaker 3:

You as well.

Speaker 1:

Thanks for listening to the Knowing what Counts podcast. Ready to optimize your wealth and protect your future, visit TheMPGroupCPAcom or call 413-739-1800 to connect with our team of experts. Remember, success is about knowing what counts.