March 2025 Newsletter: Understanding the Ins and Outs of IRA Accounts

An IRA, or Individual Retirement Account, is intended to assist you in saving for retirement.

As the name implies, the account is for an individual. It cannot be held jointly with your spouse or another person.

An IRA offers significant advantages, including:

Tax advantages include tax-free growth on Roth IRA accounts and tax-deferred growth on traditional IRAs. You may also be able to deduct contributions on traditional IRAs.

IRA accounts offer a wide array of investment options, which include stocks, bonds, mutual funds, exchange-traded funds, money markets, and CDs.

You have plenty of flexibility to develop a strategy to help you achieve your retirement goals.

Tax-deferred accounts allow you to take full advantage of compounded growth over a long period of time.

IRA accounts provide you with financial support in retirement that goes above what you will receive from a pension or Social Security.

Although various rules and account types offer flexibility and choices that cater to your needs, they also introduce complexity.

Before we go on, this review provides insights into different retirement accounts, but it is not all-encompassing. If you have additional questions, please reach out to your financial professional, or you may consult with your tax advisor with specific tax questions.

That said, let’s review the traditional IRA, the Roth IRA and the SEP-IRA.

1. Traditional IRAs

• Contributions may be tax deductible.
• Funds in the account grow tax-deferred.
• Withdrawals after 59½ years old are taxed as ordinary income.
• Withdrawals prior to 59½ may be subject to a 10% penalty, and
• Required minimum distributions (RMDs) begin at age 73.

Contributions

Beginning in 2024, the IRA contribution limit increased by $500 to $7,000; the annual limit is $8,000 if you are 50 years of age or older. These limits remain in effect for 2025.

The total contributions for all your IRAs (Roth and traditional) max out at the prescribed limits or your earned income, whichever is lower.

However, a non-working spouse may contribute to a spousal IRA as long as the other spouse is working and you file a joint tax return.

There is no age limit on regular contributions into traditional or Roth IRAs after 70½.

Does a retirement plan at work cover you or your spouse?

For 2024, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is phased out if your modified adjusted gross income (MAGI) is

• More than $123,000 ($126,000—2025) but less than $143,000 ($146,000—2025) for a married couple filing a joint return or a qualifying surviving spouse,
• More than $77,000 ($79,000—2025) but less than $87,000 ($89,000—2025) for a single individual or head of household, or
• Less than $10,000 for a married individual filing a separate return (no change in 2025), there is a partial deduction.

If you are married and your spouse is covered by a retirement plan at work and you are not, AND you live with your spouse or file a joint return, your deduction is phased out if your MAGI is:

• More than $230,000 ($236,000—2025) but less than $240,000 ($246,000—2025).

Withdrawals

After 59½, you will pay ordinary income tax if you withdraw funds from your traditional IRA account. There is no penalty.

What if you are under 59½?

You can avoid a 10% penalty in some situations, including these in Table 1. You will pay income taxes.

Additionally, you can take substantially equal periodic payments using a method approved by the IRS and avoid the penalty. Withdrawals from the account must occur for at least five years or until you reach age 59½, whichever is longer.

Table 1: Exceptions to the 10% penalty for early withdrawal of traditional IRA (under 59½)
Exception	NOT subject to 10% penalty in these circumstances	Traditional IRA
Birth or adoption	Up to $5,000 per child	Yes
Disability	Total or permanent	Yes
Death	Death of IRA owner	Yes
Survivor of domestic abuse	Up to the lesser of $10,000 or 50% of the account	Yes
Federally qualified disaster	Up to $22,000	Yes
Education	Qualified expenses	Yes
Emergency personal expenses	Up to the lesser of $1,000 or account balance over $1,000	Yes
Qualified first-time homebuyers	Up to $10,000 lifetime	Yes
Medical	Amount of unreimbursed medical expenses (>7.5% of AGI)	Yes
Medical	Health insurance premiums paid while unemployed	Yes
Levy	IRS levy of the plan	Yes

Data Sources: IRS

2. Roth IRAs

Roth IRAs are similar to traditional IRAs, with some important exceptions.

1. Contributions are not tax deductible.
2. If you satisfy the requirements, qualified distributions are tax-free.
3. You can leave funds in your Roth IRA as long as you live (there is no RMD).

Contributions

Contribution limits remain the same as those of a traditional IRA.

If you are filing jointly or as a qualifying surviving spouse, your contribution is phased out if your MAGI is

• More than $230,000 but less than $240,000 (2024)
• More than $236,000 but less than $246,000 (2025)

If you are single, head of household, or married and filing separately, your contribution is phased out if MAGI is

• More than $146,000 but less than $161,000 (2024)
• More than $150,000 but less than $165,000 (2025)

Above the respective limits, you may not contribute to a Roth IRA. If you are married filing separately and lived with your spouse during the year, no contributions are allowed if your MAGI is above $10,000.

Does a retirement plan at work cover you or your spouse?

This has no impact on your contribution to a Roth.

Withdrawals

You may withdraw contributions at any time, tax-free and penalty-free, as you have already paid income taxes on the contribution. But what about earnings?

Let’s review four scenarios.

1. Over 59½ AND the Roth is held more than five years

• You’ve met the five-year holding requirement. Withdrawals are tax- and penalty-free.

2. Over 59½ AND the Roth is held less than five years

• If you haven’t met the five-year holding requirement, earnings are subject to taxes but not penalties.

3. Under 59½ AND the Roth is held less than five years

• The earnings may be subject to taxes and penalties. Some of the exceptions to penalties are illustrated in Table 2.

4. Under 59½ AND the Roth is held more than five years

• Your earnings will not be subject to taxes/penalties if you meet one of the following conditions: See Table 2.
• You use the withdrawal (up to a $10,000 lifetime maximum) for a first-time home purchase.
• You become totally disabled or pass away.
• The exception for substantially equal payments also applies to Roth IRAs.

Table 2: Exceptions to the 10% penalty for early withdrawal of Roth (under 59½)
Exception	NOT subject to 10% penalty in these circumstances	Roth held over 5 years	Roth held less than 5 years
Birth or adoption	Up to $5,000 per child	Yes	Yes
Disability	Total or permanent	Yes/Yes*	Yes
Death	Death of IRA owner	Yes/Yes*	Yes
Survivor of domestic abuse	Up to the lesser of $10,000 or 50% of the account	Yes	Yes
Federally qualified disaster	Up to $22,000	Yes	Yes
Education	Qualified expenses	Yes	Yes
Emergency personal expenses	Up to the lesser of $1,000 or account balance over $1,000	Yes	Yes
Qualified first-time homebuyers	Up to $10,000 lifetime	Yes/Yes*	Yes
Medical	Amount of unreimbursed medical expenses (>7.5% of AGI)	Yes	Yes
Medical	Health insurance premiums paid while unemployed	Yes	Yes
Levy	IRS levy of the plan	Yes	Yes

*Not subject to taxes or a penalty on earnings
Data Source: IRS, Charles Schwab

3. The SEP-IRA

A SEP-IRA plan is designed for small businesses and self-employed individuals. Contribution limits are tax deductible to the employer, growth is tax-deferred, and withdrawals are taxed as ordinary income.

The SEP-IRA contribution limit for 2024 is 25% of an employee’s total compensation, up to $69,000.

The SEP-IRA contribution limit for 2025 is 25% of an employee’s total compensation, up to $70,000.vContributions must be made by the employer and can vary each year between 0% and 25% of compensation (up to the year’s limit). Each eligible employee must receive the same percentage.

Self-employed individuals may make employer contributions on their own behalf.

Summary

Retirement accounts provide numerous benefits. I believe that they are essential for a secure retirement. As I’ve highlighted, they offer flexibility but also introduce a certain level of complexity. I want to emphasize that your financial professional is there to assist you with questions you may have.

Tariffs and economic uncertainty

Following the election, optimism surged amid the belief that the new president would follow through with plans to pare back regulations that stifle businesses and extend the tax cuts passed in 2017.

From an investor’s perspective, so far, so good.

But candidate Donald Trump also pledged that he would enact tariffs on countries he believed were not playing fairly with U.S. manufacturers and U.S. exporters.

The 47th president has been in office for just over one month, and he’s wasted little time on the tariff front.

But why are tariffs important to investors? A better question is: Why do investors fear tariffs?

Sweeping tariffs have the potential to affect the broader U.S. economy.

• First, tariffs are a tax, and tariffs on imported goods will raise prices at home if the importer or retailer doesn’t absorb the new tax. The significant increase in levies on Canadian, Mexican, and Chinese goods strongly suggests they cannot be fully absorbed, which would lead to higher prices. According to the U.S. Census, these three nations are the top providers of goods imported into the United States ($1.4 trillion last year).
• Next, barriers erected by the U.S. will likely be met by higher barriers for U.S. exporters as countries retaliate. That may restrain production among U.S. manufacturers.
• Tit for tat: Investors are also worried that countermeasures could lead to a rapid escalation of any trade war.
• Finally, tariffs introduce uncertainty into the economic narrative, which may undermine business and consumer confidence. In turn, businesses may reduce spending until the dust settles.

Meanwhile, various economic reports suggest that U.S. economic growth may be slowing down. However, we must also recognize that economic data can fluctuate from month to month, and one month does not establish a trend.

It’s possible that the recent slowdown in economic activity is related to the weather, as some parts of the nation have experienced severe cold.

Nonetheless, we have seen a rotation out of riskier segments of the market and into more defensive issues. Although the major U.S. indexes fell last month, the Dow, which has underperformed in the past two years, is emerging as a frontrunner as we begin 2025.

Additionally, bonds have been a beneficiary of market uncertainty.

Key Index Returns
	MTD%	YTD%
Dow Jones Industrial Average	-1.6	3.1
NASDAQ Composite	-4.0	-2.4
S&P 500 Index	-1.4	1.2
Russell 2000 Index	-5.4	-3.0
MSCI World ex-USA*	1.6	6.6
MSCI Emerging Markets*	0.4	2.0
Bloomberg Barclays U.S. Aggregate Bond TR USD	2.2	2.7

Source: Wall Street Journal, MSCI.com, MarketWatch, Bloomberg
MTD returns: January 31, 2025–February 28, 2025
YTD returns: December 31, 2024–February 28, 2025
*in US dollars

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I trust you have found this review to be informative. If you have any inquiries or wish to discuss other matters, please don’t hesitate to contact me or any team member.

Thank you for choosing us as your financial professionals. We are honored and humbled by your trust.

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