In 1974, a remarkable set of legislation called ERISA was passed that completely overhauled America’s pension and retirement framework. One of the more transformative components of ERISA has turned out to be the Individual Retirement Account, or IRA, the financial retirement backbone for millions of Americans that grows in importance every year as the old-fashioned defined benefit pension plans of the past quickly disappear.

As popular as IRAs might be, however, there are still little-known features within them that can prove to be abundantly helpful if used under proper circumstances. Although these tips might not apply to everyone, every IRA owner is better off knowing that they are available if the need ever arises.

Roth Conversions

Much of the consternation involved in using an IRA is choosing between a traditional and a Roth. While it’s perfectly legal to own and contribute to both, most people tend to choose one or the other according to their income tax brackets. However, the good news is that even if you’ve elected to use a traditional IRA to take advantage of pretax contributions, that doesn’t necessarily mean that you’re locked into it forever.

The IRS allows you to convert a pretax, traditional IRA to a post-tax Roth IRA with a Roth conversion. Of course, this involves paying taxes on the balance but doesn’t include any sort of early distribution penalty. For instance, if you have been paying into a traditional IRA for years and suddenly experience a temporary but significant fall in income, your subsequent drop in tax brackets may provide an excellent opportunity to convert that traditional IRA into a Roth, therefore paying lower taxes on it then you would have otherwise. From there on out, even if you start contributing to that Roth IRA in the future, distributions will be taken tax-free in retirement.

First Time Home Buyers

Another infrequently used provision within IRAs is the penalty-free distribution allowed for first-time home buyers. In fact, the provision is even more flexible than it appears at first glance. Under these particular circumstances, a first-time homebuyer is defined as anyone that hasn’t owned a home or had a financial interest in one within the last two years.

For example, if you purchased a home 10 years ago, sold it five years ago, and have been renting ever since, you would still be eligible to take advantage of this allowance. Furthermore, if your spouse also falls under the same circumstances, they, too, are considered a first-time homebuyer and would be able to take a penalty-free distribution from their IRA as well.

How much you’re able to take to purchase a home depends on the type of IRA you own, so be sure to consult a tax professional to see what you would be allowed as a penalty-free distribution.

Would you like help reviewing your IRAs, or need help with your financial plan? We’re here to help! Simply click here or call (763) 445-2772 to schedule your complimentary consultation today!