5 Things You May Not Know About Retirement Accounts

Dana Brewer, CFP®
May 11, 2023 1:20:41 PM

Flexibility and follow-through may sound like something you would hear from a golf instructor, but ironically, those two bits of advice can also apply to the world of retirement accounts. 


Follow-through may involve making sure you are maximizing your employer's match on your retirement account as well as making sure you have elected beneficiaries who will inherit your account(s) should something happen to you.

Flexibility comes into play with understanding how money goes into accounts and how it comes out. Knowing when and how you can access your retirement accounts can give you the flexibility you may need when opportunities arise, unexpected events happen, or you need tax-smart liquidity. Here are five considerations for your retirement accounts. 

1. Beneficiary Elections on a Retirement Account Trumps a Will 

Once you have completed your estate plans and have a will in place, you are good to go, right? Unfortunately, the answer is probably not. It is common to think a will can take care of all the puzzle pieces involved in settling an estate, but that is not often the case. Follow-through is needed to add beneficiary designations on assets such as an IRA, 401k, life insurance, etc. These assets do not typically flow through the will, so each account must have appointed beneficiaries. When you elect the beneficiary of your assets, you avoid involving the will to direct to whom the assets should go at your death. Your estate attorney may have given you a letter of instruction when you completed your estate plan. Make sure the instructions were implemented with your beneficiary designations.

For example, if you had elected that your IRA goes to your mom and forgot to change it after you are married with kids, the money still goes to your mom if you die. Even if you named your spouse in the will. Including your beneficiary designations in your overall retirement and estate plan will help to make sure your assets transfer to the people and places you want to inherit. 

2. You Can Access the Money You Invested into Your Roth IRA Before 59 ½ Without Taxes or Penalty 

Tax-free growth is the main benefit of using a Roth IRA, which could benefit you as well as your heirs. Another benefit is that you can withdraw your investment contributions from a Roth IRA (not the earnings) with no tax or penalty if you’ve met the five-year holding requirement.

If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  • You use the withdrawal to pay for qualified education expenses.
  • You use the withdrawal for qualified expenses related to a birth or adoption. (Up to $5,000)
  • You become disabled or pass away.
  • If you're unemployed, you use the withdrawal to pay for health insurance or unreimbursed medical expenses that are more than a certain percentage of adjusted gross income.

3. There is a Way to Take Money out of Your Retirement Accounts Before 59 ½ Without Penalties 

Rule 72(t) allows IRA owners the flexibility to make distributions from their retirement account before age 59 ½ as long as they follow certain rules. The distribution remains taxable although you avoid the 10% early withdrawal penalty. 

The rules require you to take at least five substantially equal periodic payments. The IRS provides three methods you can use to calculate your specific withdrawal schedule. You are required to continue to make the distributions for five years or until you reach 59 1/2, whichever comes later. For those who are retiring early, rule 72(t) can add the flexibility to provide income from retirement accounts without the early withdrawal penalty. 

4. You May be Eligible to Fund a Roth IRA Even if Your Income Exceeds the Roth Funding Income Caps–Known as a Backdoor Roth

For 2023, earners with incomes below $138,000 for single filers and below $218,000 for joint filers, you may be able to contribute up to $6,500 to a Roth IRA. If single filers earn more than $138,000 but less than $153,000 and married filers earn more than $218,000 and less than $228,000, they can contribute a lesser amount. Note those over 50 can contribute an additional $1,000.

For those whose income exceeds the limits, the backdoor method allows you to still take advantage of a Roth IRA and receive tax-free growth. The backdoor method works best for people with no balance in an IRA. For example, when all your retirement money is held in your 401k.

  • Step one is to fund your empty IRA with an after-tax IRA contribution, up to $7,500 in 2023. Everyone is eligible to fund their IRA with after-tax dollars. You will not get a tax deduction, but it will set you up for the next step.
  • Step two is to convert the after-tax money in your IRA to your Roth IRA. There are no tax consequences for the conversion since all the money in the IRA was already after tax.

5. Children Can Open IRAs and Roth IRAs

If a child has been paid wages for their work, they can contribute to an IRA or Roth IRA. Typically, funding the Roth IRA is the best way to get started since the Roth will grow tax-free, and the young investor may be in a low tax bracket. Investing early can have a significant impact on the amount they could have available for their future financial needs. Many of our clients have encouraged the young earners in their lives to start investing by matching any amount of money the young person invests. The maximum they can invest is the amount they earned that calendar year, or $6,500, whichever is lower.

Teaching children the value of investing at an early age is a lesson that can pay out benefits over a lifetime.

I’ll leave you with another golf pun in hoping this “drives home” the value of knowing how flexibility and follow through can not only help your golf game, it can up your retirement game too. 

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