I was introduced to the IRA when I was in college. My finance professor used an illustration of twin brothers most advisors have seen in some form. The first brother started saving $2,000 per year into an IRA at age 20 and stopped 10 years later. His brother waited ten years to start at age 30 and saved $2,000 every year up to age 65. Thanks to the magic of compounding, the brother who started early had more money when they turned 65 despite contributing $50,000 less.

That illustration is a classic in personal finance and it made an impression on me. However, it didn’t change my savings habits. I recall, quite clearly, thinking, “Who has two grand?”

That experience popped back into my head when I read that the Investment Company Institute (ICI) estimated that roughly 88 percent of all eligible taxpayers skipped IRA contributions in 2013. Most Americans are not saving for retirement, and I have no reason to doubt the ICI, but 88 percent is a huge number. Then again, IRAs can be confusing.

To a degree, tax season is IRA season. So, I thought I would run down some common misconceptions about IRAs and a few other things to look for this IRA season.

“I can’t contribute to an IRA.” It seems like every year we take on new clients that could have contributed to an IRA but didn’t because they simply didn’t know that was an option for them.

Anyone younger than 70 ½ with earned income or with a spouse with earned income can contribute to an IRA—Roth or traditional.

Workers older than 70 ½ can only contribute to a Roth IRA, and if their modified adjusted gross income (MAGI) is below IRS limits—For 2017, $133,000 if filing as a single and $196,000 for joint filers. 

“I don’t have $5,500 for an IRA.” $5,500 (or $6,500 if 50 or older) is a maximum not a requirement. Lower contribution amounts are acceptable.

“I didn’t put anything in last year so maybe I will this year.” Frequently, people think the contribution deadline is December 31^st, but it is actually the tax-filing deadline—April 18, 2017 for 2016.

“I can’t deduct it, so why bother?” Many people decline to contribute if there is no deduction, and we spot a few every year that are wrong about their eligibility to deduct a contribution.

For singles and joint filers in which neither spouse is a qualified plan participant, deductible contributions are allowed regardless of how high MAGI may be.

Single plan participants with MAGI at $60,999 or less in 2016 can take a full deduction for their contribution. Joint filers start a phase-out of deductibility at $98,000 if both spouses are plan participants. However, if one spouse is not a plan participant, that uncovered spouse can make a full deductible contribution if MAGI is $183,999 or less, even if the uncovered spouse doesn’t work.

Higher income households often cannot contribute and deduct the contribution from their gross income. Does that mean they shouldn’t?

My professor’s illustration represents a fair argument as to why someone should consider non-deductible contributions. Clients that contribute will accumulate more money than those that don’t contribute (duh!) or those that opt to keep contributions in a taxable account. Whether they eventually keep more of the accumulation in the IRA depends on how they invest the accounts, how much comes out of the accounts, when those distributions are made and what else is on the 1040 in the year of those distributions.

The case for a non-deductible contribution is most compelling when a path to a Roth IRA is evident. Done right, distributions from Roth IRAs are tax-free and thus erase much of the just- mentioned uncertainty of using a taxable account.

The most commonly discussed path is the so-called “back door Roth”. This does not work well if the taxpayer has other IRA accounts due to the notorious pro-rata rule.

“I don’t want another account.” For years, if you wanted to preserve the ability to rollover IRA funds that came from one qualified plan into another qualified plan, you had to keep the assets in that rollover IRA segregated from all other accounts.

The rules are different now. All of a taxpayer’s IRAs are considered one IRA. Good reasons exist to have multiple IRAs, but the old rules are not one of them.

In many cases, combining IRA accounts will save fees, make it easier to rebalance and otherwise manage the accounts. Sometimes we hear that different accounts are maintained because one of them is a “nondeductible IRA.”

“What’s an 8606?” I haven’t read every word of it but to my knowledge there is no such thing in the actual tax code called a “nondeductible IRA”. IRAs are either traditional or Roth. It is the contribution to the IRA that is non-deductible.

Why is this a point of confusion? Well, it may be because Form 8606, the form on which nondeductible contributions are tracked, is titled “Nondeductible IRAs.”

Some taxpayers fail to file Form 8606 when they make nondeductible contributions and many more will forget to keep up with the matter over the years.

The burden to track nondeductible IRA contributions lies with the taxpayer. If nondeductible contributions are not tracked appropriately, upon distribution, or conversion to a Roth IRA, the taxpayer or their beneficiaries can pay taxes on funds on which taxes had already been paid.

“I’m working so I don’t have to worry about RMDs.” This one probably stems from the exemption that applies to 401(k)s.

The key is the exemption only applies to the qualified plan from the current employer. RMDs are still required from traditional IRAs, SEPs, SAR-SEPs and SIMPLE IRA plans. Only personal Roth IRAs are excluded.

RMDs start at about 3.7 percent of the IRA balance and don’t exceed 5 percent until one turns 79. Many clients do not find RMDs particularly burdensome but many find them annoying and some make the mistake of letting their annoyance determine their strategy.

I see three tactics to reduce the taxes attributable to RMDs more than others.

First, if the plan allows it, roll existing IRAs into the active qualified plan. Do this now and no RMDs will be needed in 2018 or beyond while the client is still working. A common hesitation arises when the qualified plan stinks or the assets in the IRA can’t easily transfer.

Second is to convert IRA balances to Roth IRAs. The client cannot convert amounts attributable to an RMD but additional amounts can be converted. One downside is clients that don’t like taxable income from RMDs will incur even more taxable income upon the conversion.

Last is the use of qualified charitable distributions, a payment made directly from an IRA to a qualified charity. You can’t convert RMDs to Roths, but you can give RMDs away to charity. For charitable clients, QCDs are worth a look. For those using the standard deduction, it can save quite a bit of money.

While the above misconceptions can lead to suboptimal use of IRAs, there are a few other things to consider about IRAs this season.

The 60-Day Rollover Rule

It has only been two years since IRA account holders are limited to one, tax-free, 60-day rollover between IRAs in any one-year period (365 days, not calendar year) regardless of the number of IRAs owned.

The easiest way to avoid an issue is to always move funds via a direct rollover or trustee-to-trustee transfer whereby one institution sends the assets directly to the other for the benefit of the IRA owner. Such transactions are not subject to this rule.

Inheritances

We encounter a lot of widows and widowers who do not realize they have options and automatically want to rollover their deceased spouse’s account into their own. This may be fine but surviving spouses that are young or much older than the deceased may be better served with other tactics.

Surviving spouses under 59½ will owe taxes and a 10 percent early withdrawal if they take the IRA as their own and take a distribution. If they leave the account in the decedent's name, they can make taxable but penalty-free withdrawals. Once they reach age 59½, they can transfer the account into their own IRA.

Leaving the IRA in the decedents name can help older survivors in that it preserves the ability to postpone any RMDs until the younger deceased spouse would have reached age 70½.

Designating Beneficiaries

Things change. It is a good idea to verify that the beneficiaries on IRAs and other accounts are as they should be.

Wherever confusion exists, there are opportunities to add value. IRAs are a great example of that.

Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines.  He practices in Melbourne, Fla. You can reach him at www.moisandfitzgerald.com.