Is an IRA good for your situation?
For those who don’t know what an IRA is, it stands for an individual retirement account. They are a popular place to save for retirement because they are flexible from the standpoint of what you can invest in. For example you can choose mutual funds, ETFs, index funds, bonds, stocks, and even things like limited partnerships and collectibles. Another major reason for their popularity is that they provide a tax deduction so that you can reduce your income taxes.
What about the bad news? Here are some of the reasons why they are not popular…
- You cannot borrow from the account. It is stuck in there until age 59.5
- No selling property to it
- Not able to use it as security for a loan
- Cannot buy property for personal use
Investing
The big issue with IRAs are the penalties. If you go outside of the investment restrictions it can cost you big time.
Anything from the amount of money taken from the IRA to the entire balance being treated as taxable income if you violate the restrictions.
The penalty is for pulling the money out before the eligible retirement window is 10%
- The most common limitation to traditional IRAs and Roth IRAs are the income limits. Once you make over a certain amount, you cannot contribute to them any longer in the normal prescribed manner. You have to use additional methods in order to participate in them to get around the income restrictions.
- The biggest drawback of all in my opinion to IRAs is that you can’t invest very much. They limit your contribution to $5500 in 2016.
What about IRAs in the employer sponsored world? Is that possible? Yes, IRAs can be used for SEPs and Simples. They are employer sponsored retirement plans. Both of them are set up for each participant. Simples are similar but are subject to additional special rules which we won’t get into today.
For self-employed doctors with no employees, SEPs are a great place to save for retirement. Usually, any of that income you earn on your own as a contractor qualifies. Instead of being limited to $5500 you can do up to the greater of 25% or $53k in 2016. For example if you are making less than $200k you would fall under the 25% rule but once you make over $212k you can do the full $53k.
Conclusion
Retirement plans offered through the workplace usually limit participants to an 18k contribution per year if they have a 401k, 403 or 457b. With a SEP you can do much more than this which provides a much needed boost toward retirement savings.
What should you do in your situation? Which type of IRA program is best and how should you go about getting the most out of them? Talk with you advisor or contact us. We are a fee only financial planner and investment advisor and would be happy to take any of your questions.
Related: What Physicians Need to Know About Cash Balance Plans
