Mastering IRAs: Beyond the Basics

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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

Episode Transcript

Speaker 1 (00:01):
Welcome to the Knowing what Counts podcast, the
place where expert guidancemeets smart financial decisions.
Whether you're a high net worthindividual or a thriving
business, the experts at MPCPAsare here to help you protect and
optimize your wealth.
Let's get started, becausesuccess begins with Knowing what

(00:22):
Counts.
Because success begins withknowing what counts.

Speaker 2 (00:26):
Brays are more than just retirement accounts.
They're powerful tools forbuilding long-term wealth and
minimizing taxes.
Kelly breaks down their typesof benefits and strategic uses.
Welcome back everyone.
I'm Sofia Yvette, co-host andproducer, back in the studio
today with Kelly Brace, seniortax associate at MPCPAs.

(00:49):
Kelly, how's your day been sofar?
It's been great.
How's yours?
It's been great.
Thank you so much for asking.
So.
Kelly, can you introduceyourself to the listeners and
discuss your role at the firm?

Speaker 3 (01:04):
Yeah, so my name is Kelly Brace and I am currently a
senior tax associate with thefirm.
I started here as an internabout three years ago and have
been enjoying it ever since.

Speaker 2 (01:17):
Amazing.
Now let's get into it a bitmore.
Can you explain what an IRA isand how it is different than any
other retirement accounts?

Speaker 3 (01:29):
So an IRA is an individual retirement account.
It's similar to a 401k thatsome people might be more
familiar with.
However, an IRA is notsponsored by your employer and
it can be started by anindividual, all on their own.
The contribution limits differbetween a 401k and an IRA.

(01:51):
401k investment options aretypically limited to whatever
the plan offers, but with an IRA, there's much broader range of
investment options.
A 401k has different rules ondistributions than an IRA does.
Both 401ks and IRAs havepenalties for early withdrawals

(02:13):
before the age of 59 and a half,but IRAs offer a few exceptions
to avoid these penalties.
One example might be that youcan take out for first-time
homebuyers.
Iras are also more portable andstay with you, whereas a 401k
remains with your employer whenyou leave, unless you choose to

(02:35):
roll it over into a new plan.
And another difference is thattypically there's only the
traditional and Roth 401ks,whereas there can be various
types of IRAs.
Some examples of the varioustypes of IRAs are traditional
IRAs, the Roth IRA, you can havea SEP IRA, a simple IRA, and

(02:58):
spousal and custodial IRAs.

Speaker 2 (03:10):
IRAs.

Speaker 3 (03:10):
Wow, now I hear a lot about traditional IRAs and Roth
IRAs.
What are the main differencesbetween them?
So a traditional IRA typicallythe way they work is that it
defers the tax by getting adeduction on your tax return for
the contribution that you make.
This essentially makes it apre-tax, even though you used
post-tax money to make thecontribution.
When you take thesedistributions, you'll get taxed

(03:33):
on the income and any earningsat that time.
Typically, there's no incomelimit to these contributions.
However, there is an incomelimit to getting the deduction.
Therefore, when you make acontribution and don't qualify
for the deduction, you will haveto track these contributions on
your tax returns as a basis inthe IRA so that you're not taxed

(03:56):
on the amount when you take thedistribution out.
One thing to note about thetraditional IRA is there is also
a required minimum distributionthat an individual must start
taking at the age of 73.
That is, if you're turning 73in 2025.
This age typically changes forthe year and then, additionally,

(04:18):
with a Roth IRA, a contributionis usually made with post-tax
dollars.
Thus, when the distributionsare later taken from the account
, there's no tax on that incomebecause it was already taxed
before you contributed theincome.
And again, the earnings alsotend to be tax-free, which is a

(04:41):
key benefit to making Roth IRAcontributions.
There are also contributionlimits, or income limits, to
making these contributions, justlike the traditional.
One thing that is a majordifference is a Roth IRA does
not have a required minimumdistribution, unlike its
traditional IRA.

(05:02):
Both of these IRA types have acontribution 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 (05:21):
Now, can anyone contribute to these types of
IRAs?

Speaker 3 (05:25):
Yes, essentially, anyone can make contributions to
these types of IRAs, but youmust have earned income in order
to do so.
There is no income limitationfor the traditional IRA,
although there can belimitations if you also make
contributions to a workplaceretirement plan.

(05:45):
For Roth IRAs, there is amodified adjusted gross income
limitation in order to qualifyfor making contributions.
Those modified adjusted grossincome limitations are you must
make less than $150,000 a yearif you are single and less than
$236,000 a year if you'remarried filing joint.

(06:09):
Alternatively, some options ifyou do not have earned income
but your spouse has earnedincome is a spousal IRA.
These IRAs allow a workingspouse to contribute to an IRA
on behalf of the non-workingspouse.
This would eliminate thelimitation of that spouse having
earned income in order to openan IRA, because they can use the

(06:32):
earned income of the otherspouse.
In order to qualify for this,you must be married filing joint
.
Second to that is a custodialIRA, and this IRA are open for a
minor or dependent and ismanaged by a custodian until the
child reaches a majority age.
The minor must still haveearned income in order to

(06:54):
qualify.

Speaker 2 (06:57):
Now what if you are self-employed?
Are there any IRA options foryou?

Speaker 3 (07:02):
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 forself-employed individuals or
small business owners.
This is employer-funded onlyand, as the self-employed person
, you are both the employer andthe employee, and, as the
self-employed person, you areboth the employer and the

(07:24):
employee, so you, as theemployer, can make a
contribution.
This increases yourcontribution limitations, so you
can contribute up to the lesserof 25% of compensation annually
, or $70,000 in 2025.
Another option is the SimpleIRA.

(07:44):
This is a retirement plan forbusinesses with 100 or less
employees.
Both the employer and theemployee can contribute.
This is a lower contributionlimit than the 401k, but this is
higher than the traditional IRA.
One thing to note is that thereis a mandatory employer match,
which is up to 3% of theemployee's compensation, and the

(08:07):
employee contribution limit ona simple IRA is $16,500 for 2025
.

Speaker 2 (08:17):
Now, what are the rules and tax implications when
withdrawing from these IRAs?

Speaker 3 (08:23):
what are the rules and tax implications when
withdrawing from these IRAs?
So some of the rules and taximplications for the traditional
IRAs are that the distributionscan start to be taken at age 59
and a half without facing anypenalties on doing so.
One tax implication for thetraditional is that you have to
take the required minimumdistribution, which is often

(08:44):
referred to as an RMD.
This is due to the taxdeferment.
Traditional IRAs have the RMD.
Since you deferred the tax,typically the IRS wants you to
eventually make a payment forthose taxes.
All of these distributions aretaxed at ordinary rates.
For a Roth IRA, the firstdistributions can also be taken

(09:08):
at 59.5.
When the account has been openfor at least five years and the
individual reaches that age of59.5 years old, the
distributions are tax-free.
And the other thing to note, asmentioned before, is there are
no RMDs for Roth IRAs.

Speaker 2 (09:28):
Now what if someone already has another retirement,
such as a 401k?
How does that impactcontributing to an IRA?

Speaker 3 (09:41):
So that can be a little bit tricky, but you can
absolutely contribute to both ofthose types of accounts.
However, there could belimitations on the deduction of
the traditional IRA, dependingon your income level.
If you'd like to move yourretirement from a 401k to an IRA

(10:05):
, this would be ideal for you.
This would roll the funds fromone account to another without
triggering taxes or penalties.
This preserves the tax-deferredstatus at the same time and
there's more freedom withinvestment choices compared to
the employer plan limitations.
One thing to note is that thiscan only be done once every 12

(10:29):
months, so once a year, if youwill.
Some people might work for anemployer with a 401k and also
have self-employed income, soyou can contribute to a 401k and
a SEP IRA, but there arelimitations.
401k and a SEP IRA, but thereare limitations.

(10:50):
If the SEP and the 401k arerelated to the same employer,
then the total combinedcontributions of the SEP and the
401k cannot exceed the $70,000.
Essentially, you cannot doubledip into both of these
retirement account contributions.
However, if the 401k and theSEP are completely different
employers, then you don't havethat cap.

(11:10):
So just think that the cap isper employer, not individual.

Speaker 2 (11:17):
Now what are some planning strategies around IRAs?

Speaker 3 (11:23):
So, as I mentioned before, people have certain
income levels that cannotcontribute to these Roth IRAs.
However, there's a loopholeallowing such a contribution.
That's typically called thebackdoor Roth.
This allows high income earnerswho exceed Roth IRA income
limits to contribute to a RothIRA.

(11:43):
First you would contribute to anon-deductible traditional IRA
and then convert thatcontribution to a Roth IRA.
One thing to note is thisshould be done soon after the
contribution in order to avoidtaxable earnings on the account.
It can be a little tricky ifyou already have other

(12:05):
traditional IRA accounts thathave been around for years,
because your contributions gointo one big bucket and when you
roll, some of it would beconsidered taxable earnings.
Typically, someone would open abackdoor Roth, which would be
your traditional IRA account.
They set up this empty account,they contribute their

(12:28):
non-deductible IRA amount to itand then roll it over to the
Roth and the traditional accountwould go back to zero, and you
could do this once every 12months, like the other rollovers
.

Speaker 2 (12:45):
Now, if someone is unsure which IRA is right for
them, which do they do?

Speaker 3 (12:50):
This is a very complicated area and it can
differ in outcomes depending onwhat your desires are and what
your income levels might be.
So if someone's unsure what IRAis right for them, it is always
a good idea to reach out toyour financial advisors and or
your tax accountants for anyadvice.
We'd always be happy to help.

Speaker 2 (13:11):
Amazing.
Well, Kelly, thank you so muchfor sharing those insights with
us.
We'll catch you next time.
Have a great rest of your day.

Speaker 3 (13:19):
You as well.

Speaker 1 (13:21):
Thanks for listening to the Knowing what Counts
podcast.
Ready to optimize your wealthand protect your future, visit
TheMPGroupCPAcom or call413-739-1800 to connect with our
team of experts.
Remember, success is aboutknowing what counts.