updated: Jan. 10, 2008 @ 1:07p
posted: Jun. 26, 2003 @ 11:10a
JANUARY 2008 UPDATE: Individual Retirement Arrangements, also known as Individual Retirement Accounts, are a great long-term investment tool. For specific tax information, please consult the following:
IRS Publication 590 - Individual Retirement Arrangements
IRS Retirement Tax Information Site
IRS FAQs regarding IRA Plans
IRS FAQs regarding different categories of retirement plans
This thread will cover new annual contributions to IRAs, account rollovers from 401(k) plans to IRAs, the types of IRA custodians, rollovers of IRAs between custodians, and tax issues. An effort will be made to use simple, plain-English explanations. Readers are encouraged to consult the IRS publications and, if desired, a professional tax advisor with specific questions.
CAUTION: DO NOT rely on any information herein as legal advice or accounting advice. This writer will quote what the IRS Disclaimer on their IRA FAQs said: These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided.
During January 2008, this thread will be regularly updated with more-up-to-date information as well as links to recent Fatwallet discussions. -SN
Recent (December 2007 - January 2008) IRA DISCUSSIONS
Schoolteacher: make a Roth IRA contribution or use her 403b deferred comp plan?
How long to set up an IRA for a 401k rollover?
Holding a Master Limited Partnership in an IRA?
Should I invest in a non-deductible Traditional IRA?
New Roth IRA at Vanguard - investment suggestions
Participant in employer Roth 401k - should I also invest in a Roth IRA?
Roth IRA investing for those with smaller amounts
Excess contributions to a Roth IRA
Yahoo! Finance article arguing that a Traditional IRA may be preferred to a Roth IRA
CD-based IRAs at multiple banks
Using Roth IRA to buy real estate
Late 2006 IRA DISCUSSIONS
Roth IRA contribution deadlines for 2006 and 2007?
IRA Brokerage account trading commissions
Comparing Fidelity vs. Vanguard for IRA investments
Roth IRA eligibility for children with earned income
401(k) to IRA Custodian rollover check questions
Self-employed 401(k), Solo 401(k), and SEP questions
Earned income limits for Roth IRA eligibility
Roth IRA questions from 23-year-old
401(k) to IRA Rollover: pros and cons
Q1. SN, could you briefly describe what an IRA is?
A1: An IRA is a contractual arrangement between three parties:
(a) You (a U.S. person and taxpayer who earns taxable income from gainful employment);
(b) Uncle Sam a/k/a the Internal Revenue Service; and
(c) an IRA custodian which you choose to hold the assets of your IRA Account, typically a stock broker, bank, credit union, or mutual fund company.
Q2. What do you mean by "contractual relationship?"
A2. An IRA involves a lot of special paperwork which has to be signed by you and an officer of your IRA custodian and submitted to the Internal Revenue Service.
Uncle Sam requires these documents to be completed in order for you, as the taxpayer, to receive the tax benefits of an IRA. For the financial institution, opening and maintaining IRAs is more complicated than opening a standard brokerage or deposit account.
Q3. What's a Traditional IRA? What's a Roth IRA?
A3. Both of these are "arrangements" you make to invest money towards your retirement. A summary of each follows:
(a) Taxpayers contributing to a Traditional IRA typically may deduct some or all of their annual IRA contribution directly from their taxable income. For many taxpayers, this may also provide a cut in their marginal tax rate - BUT Congress has deductibility phase-outs affecting taxpayers who work in a job where they are covered by an employer pension or 401(k) plan. Beware of this trap.
Contributions within the Traditional IRA grow on a tax-deferred basis, and only are taxable by Uncle Sam (and most states) at the time funds are withdrawn, typically in retirement.
(b) Taxpayers contributing to a Roth IRA receive NO tax deductions for their annual IRA contribution. However, contributions within theRoth IRA grow on a tax-exempt basis, based on the current tax laws which would allow all earnings to be withdrawn in retirement free of tax liability.
CAUTION: Current tax laws suggest that Roth IRA assets can grow totally exempt from taxation. What cannot be predicted with certainty is whether Congress makes future legislative changes to the Roth IRA which might repeal some or all of this tax-exempt status.
Q4. Are IRAs protected from creditors during bankruptcy?
A4. On April 4, 2005, the U.S. SUPREME COURT issued a unanimous ruling determining that Congress intended for IRAs to be sheltered from creditors during a bankruptcy proceeding. Here are some articles of interest:
Supreme Court Holds That IRAs May be Shielded From Creditors
IRAs Can't Be Seized In Bankruptcy
Supreme Court IRA Ruling Protects Retirement Money
Supreme Court Issues IRA/Bankruptcy Decision
Additional Q&As will be developed as time permits. Please PM me with suggested links.
Please check the following FW discussion threads BEFORE posting new threads about IRAs! Additional thread links will be developed as time permits. Thank you!
Vanguard mutual fund or a brokerage for Roth IRA? 08/19/06 thread
Teenager Roth IRA
Broker-to-broker IRA transfers
IRA for self employed
State tax status on Roth IRA when you move
Best super-safe, insured Roth IRAs
Caution About Postmark Date on Last-Minute IRA Contributions
Discussing where to invest new Roth IRA
Avoiding low-balance fees on IRAs
Unrelated Business Income tax impact on IRAs
IRA rollover between brokerages
Novice IRA investor questions
Roth IRA Contribution Limits
S&P500 Index Market Rate CDs and IRAs
Can I invest my Roth IRA contribution into my business
$5k Scottrade IRA: suggested investments?
Traditional to Roth conversion
401k rollover vs leaving contributions there
IRA contribution deduction limits for participants in company pension plans
Capital gains taxation on earnings in Traditional IRAs
Cost for transferring Roth IRA to different broker
IRA Contribution Deadline: Will IRS recognize prior-year contribution postmarked 04/15?
Contribution erroneously credited by broker as Current Year rather than prior year
IRA opened after submitting tax return
Poll: Best Institution for Your IRA?
IRA tax credit for low-to-moderate income households
Roth IRA Step By Step Discussion
Differences between IRA and employer-sponsored 401k
IRA sign-up bonuses?
Minor accounting quirk for mutual fund transactions within IRA
19-Year-Old College Student Asks Great Questions re IRAs