An individual retirement account (IRA) allows you to save for retirement with tax-deferred or tax-free growth. You can even control what happens to the IRA after you die.
Below are nine questions and answers designed to help you understand how IRAs work.
- How do you contribute to a regular IRA?
You can make annual cash contributions or roll over funds from an inactive retirement plan, e.g., 401(k).
- Can you have more than one IRA?
It is possible to have more than one IRA. Here are some examples:
- You have an IRA of your own, and then you inherit an IRA from a loved one.
- You have an existing Roth IRA and then convert an old 401(k) into a traditional IRA.
- Your modified adjusted gross income (MAGI) rose to the point where you were no longer eligible to contribute to your Roth IRA, so you opened a traditional IRA and made a non-deductible contribution.
- You maintained your Roth IRA and opened a traditional IRA to take advantage of tax deductions.
Note: You can contribute to as many IRAs as you want, but the total amount deposited in all IRAs is limited to the annual maximum amount. The annual maximum contribution for 2018 is $5,500 (or $6,500 if you are age 50 or older).
- Are investment gains taxable in an IRA?
A key benefit of an IRA account is the ability to defer taxes on gains and investment income. Distributions from a traditional IRA are taxed at ordinary income rates. However, distributions from a Roth IRA are tax-free (including gains and investment income) as long as the account was established at least 5 years ago.
- How do Required Minimum Distributions work?
Traditional IRA owners must begin taking required minimum distributions (RMDs) by April 1 of the year after they turn 70½ years old. The minimum amount distributed is based on the balance of the account on December 31 of the previous year and the owner’s life expectancy. For each year thereafter, the RMD amount will be recalculated and must be withdrawn. If you have more than one traditional IRA, you don’t have to take RMDs from all of them. You can combine the total RMD amounts for each of your IRAs, and take the total from one IRA or a combination of IRAs.
- Are all IRA beneficiaries treated equally?
One of the benefits of owning an IRA is the ability to transfer funds directly to beneficiaries without going through probate. Spousal beneficiaries can claim inherited IRAs as their own, a flexibility which allows the spouse to make new contributions to the IRA and does not require them to immediately take distributions.
Non-spousal beneficiaries cannot treat inherited IRAs as their own. They cannot add to them, and they must completely distribute the account within five years of the death of the owner or distribute the amounts over their life expectancies through inherited required minimum distributions. Generally, the distribution options available depend on the age at which the IRA owner dies. Keep this in mind if you plan to leave IRA assets to your children or grandchildren.
- Can you transfer or roll over an IRA to a different company?
Individuals can move accounts from one financial institution to another by transferring or rolling over the assets. Transferred assets are delivered directly from one financial institution to the other, and the transactions are not reported to the IRS. A rollover is when you distribute the assets to yourself, and then roll them over within 60 days. You can also roll over your IRA assets to another type of retirement account, such as a 401(k), if such rollovers are allowed under the 401(k) plan.
- Can IRAs be treated as Managed Accounts?
Brokerage accounts allow you to give your financial advisor written authorization to make investing decisions and routine transactions without notifying you first. Often, a flat fee is charged for managing the account. This type of activity is allowed for IRAs, provided your broker has an agreement with you to allow such actions.
- Are there investment option limits on an IRA?
The IRS limits which investment types can be held in an IRA, but your financial institution may have additional asset restrictions. For example, the IRS allows some gold and silver coins, but most financial institutions will not. Similarly, some mutual fund companies do not allow individual stocks to be held in their IRAs.
- How old do you have to be to contribute to a traditional IRA?
- If you are under the age of 70½ for the year and have earned income, i.e., paid a salary, tips or hourly wages, you can contribute to a traditional IRA. This means minor children can start saving for retirement as soon as they get their first job.
- The tax penalty (10%) for early distributions (before age 59 ½) will encourage individuals to defer taking distributions from the IRA.
- Individuals can continue to contribute to Roth IRA accounts indefinitely as long as they have earned income. This is an excellent account for money that will eventually pass as an inheritance.
There are a number of options with individual retirement accounts. It’s important to understand how the various features work to ensure you’re managing your retirement savings to meet your individual needs.
Please see important disclosure information at www.jnba.com/disclosures.