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Retirement Planning > Saving for Retirement > IRAs

Ed Slott: Advisors Are Confused About IRAs

By Melanie Waddell

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What You Need to Know

  • Only 15% of households contributed to a traditional or Roth IRA in 2021, a recent study found.
  • Advisors often ask about contribution limits and backdoor Roths, Slott said.
  • He also reminded advisors that the full RMD delay under Secure 2.0 will take 10 years to kick in.

While a recent Investment Company Institute survey indicates that contributions to IRAs are low — likely because IRA rules are “complicated” — advisors are also confused about the rules, according to IRA and tax expert Ed Slott of Ed Slott and Co.

The recent ICI survey found that the majority of U.S. households do not contribute to IRAs.

In tax year 2021, the report found, “only 15% of all U.S. households made contributions to traditional IRAs or Roth IRAs, compared with 13% in tax year 2020.”

Participants often “don’t know if they qualify, … There are complicated rules,” Slott told ThinkAdvisor Monday in an interview after finishing a two-day program for advisors.

“Even advisors are confused about IRA rules,” Slott relayed.

“There’s no income limit for a traditional IRA contribution. I thought that was well-known but we get questions on that.”

There is, however, an income limit to contribute to a Roth IRA.

Advisors are asking about doing backdoor Roth IRA conversions, which, for “a while Congress was threatening” to ban under Secure 2.0, Slott said. “That workaround is still available for higher-income taxpayers.”

Spousal contributions can also be confusing, Slott said. “As long as one spouse works, the other can do a spousal IRA and the catch-up contributions,” he said. “So there’s a lot of ways to save money in retirement, especially Roth IRAs where it grows tax free.”

Now That It’s Tax Time …

With taxes in general, Slott said, “there’s very little you can do now that affects last year. The only real thing that’s open is the ability to contribute to an IRA now, up to April 18, for last year.”

However, he said, “I’m not a big fan of that because tax deductions … aren’t worth a lot when rates are low.”

Said Slott: “A lot of people think a tax deduction is great when it comes to making a contribution to an IRA, but if they looked at it in reality what a tax deduction is … a tax deduction is really a loan you’re taking from the government that you have to pay back — at the worst possible time, in retirement.”

Plus, Slott added, “all the earnings it created may be [taxed] at higher rates.”

More advice for advisors: Counsel clients to “try to move more to Roth 401(k)s if they’re available,” he said. “A lot more companies have them now. It’s so critical to start building tax-free savings to hedge against what future higher rates can do to retirement savings. Advisors are supposed to create wealth for the long term, not to give people a sugar high for now with a tax deduction that they pay for later.”

As for Secure 2.0 …

Remember, the required minimum distribution age is 73 in 2023, not 75, Slott said. It doesn’t hit 75 “for 10 years.”

To figure out your RMD age, Slott said, “all you have to know is the year you were born.”

Chart showing which age to take RMDs under Secure 2.0 based on birth date

To help advisors understand the effective dates of the new law’s many retirement changes, he put together a Secure 2.0 Effective Dates Cheat Sheet.

Another change in Secure 2.0 that’s effective now applies to qualified longevity annuity contracts, or QLACs, which Slott said have been expanded “tremendously” under Secure 2.0.

“When I poll the advisors almost nobody is using them” in their IRAs, Slott said. “I think maybe they should take a second look.”

Tax experts Robert Bloink and William Byrnes explained that under the original rules governing QLACs, taxpayers were limited to purchasing a QLAC with an annuity premium value equal to the lesser of:

  • 25% of their account value, or
  • $145,000 (as adjusted for inflation in 2022).

The 25% limit was applied separately to separate employer plans, but in aggregate when it came to IRAs, according to two tax experts.

Secure 2.0 “eliminated the rule that previously limited the value of a QLAC to 25% of the account’s value. Further, the law modified the previous rule that limited the value of the QLAC to $125,000 by raising the cap to $200,000 (the $200,000 limit will be indexed for inflation in future years),”

QLACs “kick in generally at age 85,” Slott said.

Melanie Waddell

@Think_MelanieW

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