2018 IRA Alerts Investors Will Want to Know

The tax prep season perennially stirs financial advisors to reach out to their retirement-minded clients to review asset allocation strategies. There are several 2018 IRA alerts and reminders that may make this tax season a little smoother for everyone.

2018 IRA Alerts May Affect Tax Season Strategies

One strategy that received a boost in 2017 was the inclusion of alternative investments in retirement and other portfolios. Two recent surveys, Alternatives in the Mainstream (co-authored by InvestmentNews Research and Blackstone) and Thriving in the New Abnormal (authored by McKinsey  & Company), documented the surge of investor interest in alternatives like gold, private equity and real estate.

As alternatives have come into play, advisors and investors have become more aware of their complex custody requirements, according to Jeffrey Kelley, Senior Vice President for Equity Institutional.

“Since 1974, the IRS has permitted IRAs to include dozens of investments that are alternatives in addition to conventional stocks and bonds,” Kelley said.

As alternatives have come into play, advisors and investors have become more aware of their complex custody requirements

Managing payments, documentation and reporting of such assets can become more complicated, which is why “qualified custodians in this area require a deep understanding of these non-publicly traded assets,” Kelley added.

Examples of alternative investments include precious metals, real estate holdings, tax liens certificates and hedge funds.

You may also be interested in “Gold Investments Remain a Stable Choice Despite Economic Uncertainty.”

U.S. Treasury Gives Some IRA Limits a Bump in Cost-of-Living Adjustments

As IRAs are the one investment vehicle where taxpayers can contribute after the end of the year and still receive a tax benefit, they are especially popular during tax season. The surveys present a reminder that while the 2018 IRA contribution limit will remain $5,500 (with the standard additional $1,000 catch-up contribution for those aged 50 and older), the U.S. Treasury implemented several cost-of-living adjustments for traditional and Roth IRA phase-outs in 2018.

For retirement investors on a quest for maximum tax exemptions and deferrals, however, investing in an IRA and a workplace savings plan at the same time has its advantages.

However, if IRA investors have access to a workplace retirement plan such as a 401(k), they may not be able to additionally make a tax-deductible contribution to an IRA. Another of the 2018 IRA alerts to be aware of is that the deduction is phased out for those who earn more than $63,000 ($101,000 for couples) in 2018 — $1,000 more per person than last year. For married couples filing separately, the phase-out range remained the same as in 2017.

Source: IRS

If only one member of the married couple has access to a workplace retirement account, the tax deduction is phased out if the couple’s income is between $189,000 and $199,000. For married couples filing separately, the phase-out range also remained the same as in 2017.

Source: IRS

The inflation adjustment helps Roth IRA savers as well. In 2018, the adjusted gross income phase-out range for taxpayers making contributions to a Roth IRA is $189,000 to $199,000 for married couples filing jointly, up from $186,000 to $196,000 in 2017. For singles and heads of household, the income phase-out range is $120,000 to $135,000, up from $118,000 to $133,000 in 2017. For married couples filing separately, the phase-out range remained unchanged.

Source: IRS

More Baby Boomers Triggering Required Minimum Distributions

Also, the 2018 IRA alerts include information stating that 2018 will be the second year baby boomers who have reached 70½ years old will be subject to receiving a required minimum distribution (RMD) from their retirement investments. The tax season is ideal for both reviewing the RMD rules and developing a strategy to manage the distributions and enhance their impact. The IRS even offers an IRA RMD worksheet to help with the calculations.

Understanding Alternative Assets and IRAs

Kelley noted that while alternative investing in IRAs or other vehicles requires rigorous due diligence on the part of investors and advisors, investors are ultimately responsible for their selection.

You may also be interested in “The Evolution of Mainstream Alternative Investments”

“The adage ‘Know what you’re investing in’ is especially appropriate here,” Kelley said.

while alternative investing in IRAs or other vehicles requires rigorous due diligence on the part of investors and advisors, investors are ultimately responsible for their selection

Surprisingly, though, a recent whitepaper co-authored by InvestmentNews Research and Blackstone highlighted some disconnects between investors and advisors on this topic:

• 83% of clients are interested in alternatives.
• Yet, 67% of advisors say that clients’ “lack of understanding is a key impediment” to adding alternative allocations.
• 51% of advisors said they themselves had “a need for more insight into portfolio construction with alternatives.”