Working Toward Retirement Goals With IRAs

Retirement as we’ve known it is changing. You will probably be more active and live and work longer, and you may need to rely more on what you’ve saved for income than prior generations. If you have a qualified employer sponsored retirement plan (QRP), such as a 401(k), 403(b), or governmental 457(b), at work and regularly contribute, that might not be enough to accumulate the savings you need. Fortunately, you can contribute to both your QRP and an IRA.

An IRA allows you to save for your retirement and take advantage of tax benefits. Similar to 401(k) plans, investments in Traditional and Roth IRAs have the potential for tax-advantaged growth. This allows you to potentially accumulate retirement savings faster than you would in a taxable account. Tax deductible contributions and any earnings are subject to ordinary income tax when distributed from a Traditional IRA. Earnings from a Roth IRA, distributed as part of a qualified distribution can be taken tax free.

There are two main types of IRAs -- Traditional or Roth. Both types of IRAs offer investment flexibility, tax advantages, and the same contribution limits.

Traditional IRA - offers tax-deferred growth potential. You pay no taxes on any investment earnings until you withdraw, or “distribute,” the money from your account, presumably in retirement.¹ Additionally, depending on your income, your contribution may be tax-deductible. Traditional IRA contributions can be made at any age if you or your spouse, if filing jointly, have earned income.

If you or your spouse are covered by a workplace retirement plan (WRP), such as a 401(k), 403(b), SEP, and SIMPLE IRA², the deductibility of your Traditional IRA contribution depends on your modified adjusted gross income (MAGI). Your income must be at or below the MAGI limits in order to qualify for a deduction. You can contribute even if you don’t qualify for the deduction.

Traditional, SEP, and SIMPLE IRA owners begin taking required minimum distributions (RMDs) by your Required Beginning Date (RBD), which is generally April 1 following the year you turn RMD age. RMD age is generally the year the IRA owner turned age 73 (if born after 1950), 72 (if born after 6/30/1949), or 70 ½ (born before 7/1/1949).

Roth IRA - offers tax-free growth potential. Investment earnings are distributed tax-free, if the account was funded for more than five years and you are at least age 59½, or disabled, or using the first-time homebuyer exception, or taken by your beneficiaries due to your death.¹ Since contributions to a Roth IRA are not tax-deductible, there is no tax deduction, regardless of income.

You, or your spouse, if filing a joint tax return, must have earned income and your MAGI must be at or below the phase-out range to be eligible to contribute to a Roth IRA. There are no age limits for making a Roth IRA contribution.

Also, you can convert a Traditional IRA and eligible rollover distributions from your QRP to a Roth IRA. Be aware you will owe ordinary income tax on the taxable portion you convert but not the IRS 10% additional tax for early or pre-59½ distributions. However, taking a distribution from your Traditional IRA or QRP to pay the taxes due on the Roth conversion will result in additional income taxes and if you are under 59½, the 10% additional tax.

Roth IRA owners do not have to take RMDs during their lifetime.

SIMPLE & SEP IRAs - small business owners may use SEP IRAs and SIMPLE IRAs to provide a retirement plan for their employees. These plans are intended for small businesses with a few employees. A SEP IRA is a Traditional IRA that holds employer contributions under the SEP plan.¹

Retirement Plan Distribution Options - if you change jobs, are displaced, or retire, one of the most important decisions you may face is how to handle the money you’ve worked hard to earn and save in your QRP. You generally have four options for your retirement plan assets:

1. Roll assets to an IRA
2. Leave assets in your former employer’s plan, if the QRP allows
3. Move assets to your new/existing employer’s plan, if the QRP allows
4. Take a lump-sum distribution (taxes may apply)

Each of these options has advantages and disadvantages, and the one that is best depends on your individual circumstances. You should consider features such as investment choices, fees and expenses, and services offered³.

It can be a confusing decision to make. Here are some things to think about:

• The difference in services offered, investment options, and fees and expenses between the QRP and IRA
• When distributions are no longer subject to the 10% additional tax
• Your need for help making investment decisions
• Any special tax considerations regarding employer stock in your QRP
• Timing of RMDs
• Protection of assets from creditors and bankruptcy
• Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans.

Your Financial Advisor can help educate you regarding your choices so you can decide which one makes the most sense for your specific situation. Speak with your current retirement plan administrator and tax professional before taking any action.

The Internal Revenue Code (IRC) determines how and by what date you can make IRA contributions. Whether your contribution is deductible or not, you generally need to make your IRA contributions by the tax filing deadline, typically April 15 for the prior year.

Your total contributions to all of your Traditional and Roth IRAs cannot be more than the annual maximum for your age or 100% of earned income, whichever is less.

2023 tax year maximum annual contribution:

• $6,500 if you’re younger than 50
• $7,500 if you’re 50 or older within a particular tax year, or
• 100% of your taxable compensation for the year, if your compensation was less than the maximum contribution limit.

2024 tax year maximum annual contribution:

• $7,000 if you’re younger than 50
• $8,000 if you’re 50 or older within a particular tax year, or
• 100% of your taxable compensation for the year, if your compensation was less than the maximum contribution limit.

It is generally a good idea to maximize your IRA contributions to potentially gain the full benefit of tax-advantaged savings and increase your retirement assets.

At Wells Fargo Advisors, you can make contributions to your IRA online and using your mobile device.⁴ IRA contributions received between January 1 and the tax filing deadline, generally April 15, must indicate if the contribution should be attributed to the current year or prior year. If no contribution year is indicated, the contribution will be considered a current-year contribution.

You or your spouse, if filing jointly, must have earned income such as wages, tips, or commissions to qualify to contribute to an IRA. Eligible compensation must be from personal services currently rendered. Review IRS Publication 590-A (PDF) for a comprehensive list of what is and is not earned income.

• Open or fund an IRA. Being covered by a QRP does not prevent you from fully funding an IRA, as long as you qualify to make the contribution.
• Ask your financial advisor which IRA may be best based on your situation.
• Find out if you can deduct your Traditional IRA contribution. If not, you may still benefit from tax-deferred growth potential or, if eligible, consider funding a Roth IRA.

IRA Disclosure Statement and Custodial Agreement: The Disclosure Statement and Custodial Agreement is designed to provide you with an overview of an IRA, including tax benefits and considerations, as well as contribution and distribution rules. The first part of each document includes the disclosure statement required by the Internal Revenue Service. The disclosures will explain the basic rules and tax considerations you should understand if you adopt an IRA. The second part of the document includes the Custodial Agreement. Click here to view the documents.

Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.

¹Traditional IRA distributions are generally taxed as ordinary income. Qualified Roth IRA distributions are tax-free provided a Roth IRA has been funded for more than five years and the owner is at least age 59 ½, or disabled, or using the first-time homebuyer exception, or taken by their beneficiaries due to their death. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Distributions from Traditional and Roth IRAs may be subject to a 10% additional tax if distributions are taken prior to age 59 ½. For SIMPLE IRAs, the IRS additional tax increases to 25% if a distribution is taken prior to two years from when the first deposit was made into a participant’s account if under age 59 ½.

²The “Retirement Plan” box in Box 13 of your W-2 tax form should be checked if you were covered by a WRP.

³Please keep in mind that rolling over assets to an IRA is just one of multiple options for your retirement plan. Each of the following options is different and may have distinct advantages and disadvantages.

1. Roll assets to an IRA
2. Leave assets in your former employer’s plan, if plan allows
3. Move assets to your new/existing employer’s plan, if plan allows
4. Cash out or take a lump sum distribution

When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when distributions are no longer subject to the 10% additional tax, treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.

⁴Brokerage IRAs with Brokerage Cash Services are eligible for this feature. Online access is required. Talk to your Financial Advisor for more information about the benefits of Brokerage Cash Services.