What Is a Managed IRA and How Does It Work?

A Managed Individual Retirement Account (IRA) offers investors a hands-off approach to retirement planning by providing professional management of their investment portfolio. This option appeals to those who prefer not to manage their investments actively or lack the expertise to do so effectively.

Eligibility Factors

Eligibility for contributing to a Managed IRA depends on income level, tax filing status, and earned income. In 2024, the IRS set income thresholds for traditional and Roth IRAs. For Roth IRAs, single filers with a modified adjusted gross income (MAGI) up to $153,000 can contribute fully, while those earning between $153,000 and $168,000 qualify for reduced contributions. For married couples filing jointly, the phase-out range is $228,000 to $243,000.

Age-related rules have evolved. The SECURE Act of 2019 eliminated the age cap for contributing to traditional IRAs, allowing individuals to contribute as long as they have earned income. This change reflects the growing trend of people working later in life and needing to save for longer retirement periods.

Earned income is essential for IRA contributions. Wages or self-employment income qualify, but passive income like rental income or dividends does not. This ensures contributions are tied to active workforce participation.

Contribution Rules

Contribution limits for a Managed IRA in 2024 are $7,000 for individuals under 50. Those 50 and older can make an additional $1,000 catch-up contribution, bringing the total to $8,000. These limits apply collectively across all IRAs, meaning contributions to both traditional and Roth IRAs cannot exceed the set thresholds.

Contributions for a given tax year can be made until the tax filing deadline of the following year, typically April 15th. Exceeding contribution limits results in a 6% penalty tax for each year the excess remains in the account. Tracking contributions and withdrawing any excess before the deadline helps avoid penalties.

Fee Structures

Fee structures in Managed IRAs significantly impact overall returns. Common fees include management fees, administrative fees, and sometimes performance-based fees. Management fees, typically 0.5% to 2% of assets under management (AUM), are deducted annually. Administrative fees cover account maintenance and record-keeping and may be charged as flat rates or percentages of AUM. Performance-based fees, tied to achieving specific benchmarks, align manager and investor interests but may encourage riskier strategies.

Hidden fees like transaction costs or mutual fund expense ratios can also erode returns. Frequent trading may result in elevated transaction costs. Reviewing a comprehensive fee schedule from the IRA provider is essential for understanding the total cost.

Rollover Options

Rollover options for a Managed IRA include direct and indirect rollovers. A direct rollover transfers funds directly between retirement accounts, avoiding the 20% mandatory withholding tax applied to indirect rollovers.

With indirect rollovers, account holders must deposit funds into another retirement account within 60 days to avoid taxes and penalties. Missing this deadline results in the distribution being taxed as ordinary income and, for those under 59½, a 10% early withdrawal penalty.

Distribution Requirements

Distribution requirements for a Managed IRA vary by type. Traditional IRAs require Required Minimum Distributions (RMDs) starting at age 73, as outlined in the SECURE 2.0 Act of 2022. The RMD amount is based on the account balance as of December 31 of the previous year and a life expectancy factor from IRS tables. Failing to take the RMD incurs a 25% penalty, reducible to 10% if corrected promptly.

Roth IRAs do not require RMDs during the account holder’s lifetime, offering flexibility for preserving assets. However, beneficiaries of inherited Roth IRAs must usually distribute the account within 10 years unless they qualify as eligible designated beneficiaries under IRS rules.

Strategically timing distributions can reduce tax consequences. For example, retirees with lower income in early retirement may benefit from withdrawals that keep them within lower tax brackets. Qualified charitable distributions (QCDs), allowing up to $100,000 annually to be donated tax-free, can also satisfy RMD requirements while reducing taxable income.

Tax Considerations

Tax implications significantly affect a Managed IRA’s growth and net income during retirement. Traditional IRAs offer tax-deferred growth—contributions are often deductible, but withdrawals are taxed as ordinary income. This benefits individuals anticipating a lower tax bracket in retirement. However, large distributions can push retirees into higher tax brackets, especially when combined with other income sources.

Roth IRAs, funded with post-tax dollars, offer tax-free qualified withdrawals. This makes them attractive for those expecting higher future tax rates or seeking to avoid RMDs. They also provide a hedge against potential tax increases, ensuring predictability in retirement planning.

State taxes further influence retirement strategies. States like Florida and Texas do not tax retirement income, while others, such as California, tax IRA distributions as ordinary income. Consulting a tax professional can help develop a tax-efficient approach aligned with both federal and state regulations.