Are you carefully preparing your retirement investments? Join Palmer Klaas, of Palmer Klaas Financial Group L.L.C., as he dives into the world of IRAs and explains the basics of how they work.


The world of IRAs is exciting, with its tax advantages and growth opportunities for a better retirement.

There are various types of IRAs, such as the traditional IRA, Roth IRA, Simple IRA and SEP IRA. We will be looking at primarily the traditional IRA and Roth IRA and the nuances, differences and uniquenesses of each. It’s important to consult with a tax advisor for clarification of the IRS guidelines.

There are significant tax advantages of IRAs. Tax deferral and, in the case of the Roth IRA, tax-free growth, can greatly benefit a person in building a better retirement.

The traditional IRA gives a tax deduction and the growth is tax-deferred. Upon distribution, the amount withdrawn and paid to the IRA holder is taxable. The advantage lies in the years an individual can let the tax savings grow.

If withdrawals are made prior to age 59.5 (unless an exception given) the amount withdrawn has a 10 percent IRS penalty. An individual may contribute to a traditional IRA if there is earned income (not investment income) and they are younger than age 70.5 at the end of the calendar year for which they’re making the contribution.

The Roth IRA does not give a tax deduction, but the growth is tax-deferred. Upon distribution, the amount withdrawn is tax-free to the Roth IRA holder, though it needs to be held for at least five years and until age 59.5 or older. If taken too soon, the same 10 percent early surrender penalty applies to the growth portion, and the growth amount is then taxed. Contributions may be made to the Roth IRA at any age (no 70.5 rule), but the income eligibility requirements must be met.

For the traditional IRA, for tax deductibility, there are income phase-out limits based on whether an individual is covered by an employer retirement plan, such as a 401(k). The Roth IRA contribution eligibility has income phase-out limits that are not based on an employer retirement plan. Ask your financial advisor for the income phase-out amounts for each type of IRA.

Both the IRA and Roth IRA have a contribution limit of $5,500 per calendar year of earned income if under age 50. When age 50 and over, it is $6,500 of earned income. The income phase-out limits could either reduce or eliminate entirely the deductibility of the traditional IRA contribution or the eligibility of the contribution itself for the Roth IRA. A person may contribute to both a traditional IRA and Roth IRA in the same eligible year, but the total contributions combined must not be more than the one maximum of $5,500 or $6,500, depending on age.

The IRS wants to start taxing traditional IRAs, and thus it has a Required Minimum Distribution (RMD) that states the individual must begin taking RMDs no later than April 1 of the year following the year in which you reach 70.5. For beneficiaries, distributions vary depending on the beneficiary’s relationship to the account owner as well as the account owner’s age at death. For the Roth IRA owner, the RMD is not required, but the rules for RMDs for beneficiaries vary.

There is good news that the IRS allows 401(k) plans to have a Roth 401(k) component. In fact, for one of my client’s employer 401(k) plans, we recently added the Roth component. Check with your employer to see if the plan allows contributions to a Roth 401(k) in addition to the traditional 401(k). If not, your employer may be able to add the Roth 401(k) component.

The IRS allows converting an IRA to a Roth IRA, but be aware that, after conversion, an individual must pay tax on the portion converted from the traditional IRA to the Roth IRA. The key is having enough time to allow the Roth IRA to grow. An ideal situation is a young person in a lower tax bracket who has 30 years or more to grow the Roth. The key is that the tax-free growth is large enough to overcome the consequence of paying tax early on the traditional IRA. When converting, it is wise to check with a tax advisor to be sure the conversion is an amount that does not put the individual into the next higher tax bracket. One strategy is to only convert the portion each year that keeps the individual from moving into the next higher tax bracket.

There are two employer plans: the SEP IRA is for any employer and the Simple IRA is for any small­-business employer with 100 or fewer employees. The maximum amounts that can be contributed are higher than the traditional and Roth IRAs. The SEP IRA and Simple IRA have far less red tape than 401(k) plans and have worked well for certain employer clients in my practice.

Palmer Klaas is a Certified Financial Planner™ with Palmer Klaas Financial Group, L.L.C., 4615 East State St., Ste. 200, in Rockford. For more information, call (815) 391-8084 or visit
Securities offered through Regulus Advisors, LLC. Member FINRA/SIPC. Investment advisory services offered through Regal Investment Advisors, LLC., an SEC Registered Investment Advisor. Regulus Advisors and Regal Investment Advisors are affiliated entities. Palmer Klaas Financial Group is an independent entity.