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."
