A few years ago, a slew of my clients rolled over their IRA’s into Roth IRA’s. Because there was a tremendous tax benefit to doing so- and the IRS provided a short period to make these non-taxable conversions. (NO! The conversions really aren’t non-taxable; but the IRS provided a window when you could make them without paying taxes. That is no longer the case.)

And, given that it is October and folks are considering ways to lower their taxes, I thought this was a good time to review the various IRA rules.

First, as long as you are NOT covered by a pension or 401(k) plan at work, you can make a deductible IRA contribution. If you are under 50, then your maximum deductible IRA contribution is $ 5500; it’s $6500, if you are older.

And, if one of you is covered by a pension at work (assuming you are married)- but not both of you- then if your adjusted gross income is less than $ 184K, your IRA contribution is deductible. It becomes less deductible until your income exceeds $ 194K, the level at which you can’t make a deductible contribution. (If you are filing separately, the person without a pension can make a deductible contribution ONLY if their individual income is less than $10K).

Note that Roth IRA contributions are never deductible. Income withdrawn from a conventional IRA (when you retire) is subject to income tax; you already paid the tax on the Roth IRA income (that’s why they are non-deductible when you make the contributions), so you only pay tax on the portion of retirement withdrawals that were the gains (interest, dividends, etc. on the principal of the contributions you made)- should you take a non-qualified distribution from the Roth. (Non-qualified distributions are those taken before you reach 59.5 years of age; there are exceptions, such as buying a first home or educational expenses.)

The other difference between the IRA’s is that when you turn 70.5 y, you must take a withdrawal from your conventional IRA. There is a formula for how much and that amount is called the RMD- required minimum distribution. There is NO RMD for Roth IRA’s for those who made the actual contributions. However, any beneficiaries of the Roth IRA holder are required to take distributions.

As you can see from the chart below, folks who were able to make non-taxable Roth rollovers get the same benefits as if they made a regular Roth contribution. Those that have effected taxable rollovers or conversions must make sure they are older than 59.5 y (see non-qualified distributions, above) to obtain the maximum tax benefits.

Either way, you should be getting some money together to make those IRA contributions.  Or your retirement years will be pretty dreary.

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