Individual Retirement Accounts (IRAs) Flashcards
Individual Retirement Accounts (IRAs)
Because IRAs are established by individuals, they are not considered “qualified plans”.
Traditional IRAs
Anyone with taxable income may contribute to a traditional IRA. Contributions may be tax deductible unless the owner is a participant in an employer-sponsored retirement plan and gross income exceeds certain thresholds.
Earnings on the contributions grow tax deferred until they are withdrawn. There is a maximum annual contribution allowed by the IRS, as well as a “catch up” contribution for persons age 50 and older. Upon withdrawal, distributions from an IRA are fully taxable as ordinary income.
Required Minimum Distributions (RMDs)
Individuals must begin taking taxable distributions by April 1st after the year they reach age 73. There is a 25% tax penalty on the amount not withdrawn if the required minimum distribution is not taken.
Premature Distributions
Withdrawals before age 59½ generally are subject to a 10% penalty tax.
or state exam purposes, life insurance is not a permissible investment in an IRA.
An IRA account owner may take an early withdrawal without a penalty tax when certain qualified events occur, such as:
Death or permanent disability
Up to $10,000 for the down payment on a home as a first-time home buyer
Medical expenses not covered or reimbursed by health insurance, or to pay health insurance premiums
Qualified educational expenses
Roth IRA
A Roth IRA is a nondeductible tax-free retirement plan for individuals of any age with earned income. Maximum annual contribution limits apply as set by the IRS, plus a catch up contribution for persons age 50 or older.
Unlike a traditional IRA, contributions are not tax deductible. As long as the account has been open for at least 5 years and the owner is at least 59½, proceeds under a qualified distribution are received tax free.
Taxpayers can also take a tax-free and penalty-free distribution of earnings in cases of a death, disability, or qualified first-time home purchase
A nonqualified distribution is subject to taxation of earnings and a 10% additional tax, unless an exception applies. If a person owns a traditional IRA and a Roth IRA, the combined contributions to both cannot exceed the annual maximum IRA contribution for one IRA.
Rollovers and Transfers of IRAs
The IRS permits an IRA rollover or a transfer from one account to another. This may avoid taxation as an early withdrawal.
Rollover
If the payment is made directly to the IRA owner, they will have 60 days to deposit the check into a new IRA to avoid taxes and penalties. This type of transaction is reported to the IRS and is only allowed once in a 12-month period. A 20% withholding of funds is required unless a direct rollover occurs.
A direct rollover applies when the funds are transferred from one qualified plan to the trustee of an IRA or another plan. While this is reportable, the income is not taxable, and there is no 60-day requirement.
IRA Transfer
In many cases, IRA assets can be transferred directly into a new account. An IRA transfer is the movement of funds between the same type of plan, such as two IRA accounts. The money is transferred directly from one financial institution to another. Transfers are not taxable and can take place as often as desired.
