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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
IRA Strategy
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

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Member Summary
Most Recent Posts
I have had a solo 401k at TD Ameritrade for a couple of years and would highly recommend it for many people, but I think... (more)

careful (Jul. 18, 2014 @ 9:50p) |

A few questions about Roth contributions:

Is earned income the gross amount on the pay stub? Or is it after taxes? I'm as... (more)

LokiMre (Jul. 20, 2014 @ 3:49a) |

Gross income.

no, but a few new funds have 0.5% purchase fees. Yes, you can contribute more than once a year, but I belie... (more)

stanolshefski (Jul. 20, 2014 @ 6:07a) |

2005 limits $4000 age 50&above $4500
2006 limits $4000 age 50&above $5000
2007 limits $4000 age 50&above $5000
2008 limits $5000 age 50&above $6000
2009 limits $5000 age 50&above $6000

See link for more details.

Various sites showing comparison of retirement accounts:
Regular vs Roth IRA
401k vs Roth IRA
Roth IRA calculator
Fairmark IRA comparisons

Wikipedia Links:
Roth IRA
Traditional IRA
401K


72(t) Substantially equal IRA withdrawal discussion
High Income Roth IRA rollover strategies


Title Insurance Tips and Strategies


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Does anyone know of IRA providers who allow you to purchase U.S. Savings Bonds (Series I or Series EE) within the IRA account?

Savings Bonds have been heavily discussed as a relatively high-yield, low-risk investment. However, I haven't found stockbrokers offerering Savings Bonds and my impression is most bank/CU IRAs don't accommodate US Savings Bond investments.

Has anyone found a way to invest in U.S. Savings Bonds within their IRA?

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IF you find a bank that is willing to do this, the bonds will be registered under your own SSN but with the names of both yourself and the bank's (trustee/custodian). The bonds will be sent directly to the bank.

The bank will also have to fill out PD F 5374-1: ORDER FOR SERIES I US SAVINGS BONDS TO BE REGISTERED IN NAME OF FIDUCIARY

My guess is the big banks would not take the trouble to do this for retail clients; just look for a bank that accepts savings bonds as IRA investments.

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SN, I know there must be something I'm missing but why do you want to invest savings bonds in an IRA, ROTH right? These bonds are 1) already state tax exempt, 2) tax deferred. The only positive of having a bond in IRA is not paying federal taxes on the deferred income. I would want to invest in BOTH IRA and savings bonds and have a farther reach on tax deferred investments. Also insurance cash value is another tax deferred vehicle.

For all the talk about ROTH, I still personally prefer traditional, although maybe it is safer to do a little of both (in terms of a tax hit at mandatory 70-1/2 withdrawal, thanks Sasha5 ). Take the example of an investment similar to savings bond which is earning less than 5% interest, by sheltering in ROTH you will EXEMPT (your ordinary rate x 5% interest per year), but if you do traditional IRA, you will DEFER (your ordinary tax rate x savings principal 3K/yr). Which is a better savings??? Now I'm not sure, so I should rethink my preference for traditional.

...Seems they are exactly the same:

For Roth: I will be saving approximately .5-1.9% (ordinary rate x 5%) on 3K/year compounded. 3K x .5-1.9% = $15-57

For Traditional IRA: I can defer $300-1158 (10-38.6%)of 3K/year, which if invested at 5%, saves me $15-57, assuming I'll owe the same amount of deferred income later. Or if used to pay down higher interest debt, could save you more than 5%.

So the question is 1) do you think tax rates will be going up in the future? and 2) will you be in a higher or lower tax bracket during your retirement and 3) do you plan to pass on the ROTH as tax free inheritance?

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tooshy: you reminded me of a very good point - that while SBs are currently offering an above-average yield for a "low-risk" investment [the reason I wondered about including them in an IRA], they are redundant in duplicating many of the tax advantages already enjoyed within a Traditional or Roth IRA.

This reminded me of some news reports that some investors who, having been were badly burned by investing most of their IRA assets in high-risk equities, have actually invested some of their proceeds in "safe" investments such as into TAX-EXEMPT state/municipal bonds or TAX-DEFERRED annuities. Somehow, they didn't realize how the duplication of tax-deferred or tax-exempt status substantially lowered their real investment yield.

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Hi Tooshy I believe you are wrong about the mandatory withdrawal age. You can withdraw but don't have to at 59 1/2 with out the 10% penalty. The mandatory age is 70 1/2.

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I like ROTH because:
1) I think/hope/wish I'll make more when I'm 60 than what I'm making now
2) I can withdraw the ROTH principals penalty-free anytime for any reason.

Now, when I reach a high enough tax bracket, I'll definitely switch back to traditional IRA.

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you can also take out u pto 10k to buy your first house if its been there for more than 5 years

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for the buying a house withdrawal, how does that work... 5 years after the date the IRA was opened.. 5 years after the tax year? let's say I started in March '02, when would I be eligible for withdrawal?

thx

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After some reading, I have reached my conclusion that ROTH IRA is definitely better than traditional (deductible) IRA, especially for young people who have many years of contributions ahead. Reason: Under current law, social security benefits paid to retirees are taxable for aggregate income above $25K single/$32K joint (not adjusted for inflation???), therefore mandatory distributions under traditional IRA may bump a retiree's income above these thresholds, in which case social security income would be taxed dollar for dollar above these thresholds. Roth distributions are completely tax free, therefore may offer a decisive advantage for social security recipients. On the other hand, traditional IRAs are completely taxable (principal + interest) and saddled with mandatory distribution after 70-1/2, therefore one should seriously avoid this tax whammy. Although tax laws may change, and social security benefits could become 100% taxable for everyone anyway (instead of means-tested), who knows?

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Tooshy observed:

<< Roth distributions are completely tax free, therefore may offer a decisive advantage for social security recipients. On the other hand, traditional IRAs are completely taxable (principal + interest) and saddled with mandatory distribution after 70-1/2, therefore one should seriously avoid this tax whammy. >>

Excellent point!

rated:
A few more frequently asked questions:

Q. Can I open a joint IRA with my spouse?
A. No. Individual Retirement Accounts have to be opened separately, though a spouse can be named as a beneficiary.

Q. Can I make contributions into both a Roth IRA and a Traditional IRA?
A. Partly yes, partly no. If your income is within the allowable contribution limits, you could potentially split your annual IRA contributions between a Roth and Traditional. However, the total contributions are still capped (for most people, $3,000 a year). See the IRS regs.

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Should I open a CD or an IRA? is an excellent discussion initiated by a 19-year-old college student. Highly recommended discussion of Roth IRAs and long-term-focused mutual fund families.

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i believe if you are starting out (ie - little to no funds in your ira), its not worth buying stocks given the huge ratio of commission to price. you shoudl stay in cd until you have collected a few years worth of funds.

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Mshen raises a very strong point: with small-balance IRA accounts, be very careful about transaction costs and fees related to your investments. Pay particularly close attention to trading commissons and mutual-fund transaction fees on small investment amounts.

If your IRA account balance is modest (i.e. $1500), be careful to avoid brokers like Charles Schwab which ding you with very high fees for low balances or annual custodial fees. Paying a $45 annual custodial fee on a $1500 investment in money-market funds paying 0.5% yield doesn't make economic sense, and totally defeats the concept of saving for one's retirement.

If you are starting out with a small IRA, look for providers who are small-account friendly. Among equity brokers, Scottrade and Sharebuilder seem to be good choices. Among banks, your best choice is probably a local credit union that offers an adequate choice of IRA savings and IRA CD products and low or no annual custodial fees.

Check out American Savings Education Counciland Save For Your Futurefor more ideas on starting out with a small IRA.

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I just quit my job and I have a lot of money in my 401k. I am deciding whether to roll over the 401k to my new employer's 401k plan or whether to roll over to a traditional IRA?

I understand that you can borrow up to $50K from the 401k but I am not sure how much you can borrow from a traditional IRA? I would prefer to borrow from the traditional IRA because the loan is not tied to my employment (i.e. with 401k, i have to pay back entire loan amount within 60 days if my employment is terminated for any reason).

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Can't take a loan against an IRA. You can withdraw from your IRA and then have 60 days to redeposit the money in the account or in a new IRA account ONCE A YEAR.

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kharvel: generally speaking, you can't borrow money from an IRA or use an IRA as loan collateral. As noksagt stated, you have a very limited ability to make a short-term withdrawal but be very, very careful about the rules governing! Otherwise, you can face a very steep tax penalty.

You correctly observe that borrowing from an employer 401(k) account is risky because if your employment ceases, you have to repay the loan within 60 days or face a whopping "premature withdrawal" tax penalty. A lot of people have ignored this fact at their peril.

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Good thread!

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Hope I can ask this here...

After many years of keeping my IRA at a discount broker and keeping it mostly in stock, I now find myself with with a large chunk of CASH earning a very, very low rate.
Like 1/10 of 1%.

I need help on how I can maximize my yield for excess cash while still retaining relative liquidity in the event I find stocks I want to buy.

Its at RJT.com

Thanks

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put it in a virtualbank or ING Direct account till you decide what to do, 0.10% is ridiculous

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bump to prevent archiving

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As IRA season approaches, remember to clearly indicate the TAX YEAR of the contribution with your payment (e.g., on the check memo line) and VERIFY that it is recorded correctly by your financial institution. Some institutions (TD Waterhouse... grrr) default the contribution to the calendar year in which it is made, which may cause you to miss an entire year's worth of contribution room.

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bump

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SeattleNative said:

<< kharvel: generally speaking, you can't borrow money from an IRA or use an IRA as loan collateral. As noksagt stated, you have a very limited ability to make a short-term withdrawal but be very, very careful about the rules governing! Otherwise, you can face a very steep tax penalty. >>

Sorry if this question is an ignorant one, but I just started researching retirement accounts, please go easy on me

1. In the case of a Roth IRA, you can withdraw ANY amount of your actual contribution at ANY time (after five years), and up to 10K in interest accrued IF it's going towards your first home (after five years).
2. It's a no-brainer if you are a student and have minimal income, to open a Roth IRA vs. other IRAs because of tax considerations.

Do I have the right idea? TIA!

Edited for clarification

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Appreciate the info. I have excess cash after paying off my car a year ago and have been debating about starting an IRA.

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This thread is being updated. We have had many discussion threads on IRAs in recent months which I want to link to the FAQ. Stay tuned

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Is there a thread that discusses which companies are better to go with for Roth IRA's?

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Does anyone have any experience with Self-Directed IRAs?

Even more specifically, has anyone ever used the funds in their self-directed IRA to buy investment/rental properties?

I've tried searching this site and the internet using google but I haven't been able to find anything specific on self-directed IRAs and real estate investing.

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Bumping thread for interest - 'tis the season to start talking about IRAs!

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SN, Here is a great site that goes into a lot of detail on Roths: http://www.fairmark.com/rothira/index.htm

(Thanks to PugRanch for listing this site in one of the Roth threads)

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BUMP

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An interesting thing happened this year. Our 401K plan capped deduction at 10% for people earning 90K and above in the year. So the max 401 contribution for FY 05 will be 9K if you earn 90K.

Is this person going to lose out on tax deductions or can he also start an IRA to get full tax deduction?

Has someone here has come across this situation

N

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Nope. Being capped in one's 401k has no affect on one's eligibility for a IRA.

Happens to people all the time, I'm capped at 9%.

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needdealsnow said: Is this person going to lose out on tax deductions or can he also start an IRA to get full tax deduction?

What do you call a tax deduction here? If you are covered by a 401K plan (regardless of the cap) your tIRA deductibility is phased out. I think you cannot deduct any of it with 90K income...

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manuel said: Nope. Being capped in one's 401k has no affect on one's eligibility for a IRA.

Happens to people all the time, I'm capped at 9%.


I am confused. You are saying that being capped in 401K does not impact one's eligibility for IRA. Do you mean that one can contribute to an IRA even when you are contributing to a 401K? Do you get tax deductions on contributions made to the IRA as well?

N

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needdealsnow said: manuel said: Nope. Being capped in one's 401k has no affect on one's eligibility for a IRA.

Happens to people all the time, I'm capped at 9%.


I am confused. You are saying that being capped in 401K does not impact one's eligibility for IRA. Do you mean that one can contribute to an IRA even when you are contributing to a 401K? Do you get tax deductions on contributions made to the IRA as well?

N


Yes. However, if you're eligible for 401(k) then the amount you can contribute to a traditional IRA is constrained by your AGI. I think it's phased out completely at 45k. Roths are only phased out completely at 110k.

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Say if a person is gonna put 1k in a Vangaurd Roth IRA however they have already done thier taxes, would this do anything to your income/tax return for this year? I know that 1k is trival so should I wait till after the 15th to do it? I like thier target retirement options, makes it a pretty no brain decision.

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DamnoIT said: Say if a person is gonna put 1k in a Vangaurd Roth IRA however they have already done thier taxes, would this do anything to your income/tax return for this year? I know that 1k is trival so should I wait till after the 15th to do it? I like thier target retirement options, makes it a pretty no brain decision.

You should probably amend your return to reflect your contribution - you may be eligible for the saver's credit, and I think they need to have a record of when you started making contributions so that they can determine your eligibility for early withdrawals.

Skipping 1660 Messages...
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LokiMre said:   A few questions about Roth contributions:

Is earned income the gross amount on the pay stub? Or is it after taxes? I'm assuming gross, but I wanted to make sure.

Does Vanguard charge a fee when I contribute to a Roth IRA account, and when I put money into a fund?
Can I contribute more than once each year?

I had a job for 2 months at the beginning of this year, and earned a little bit. I'd like to go ahead and put that into a Roth account.
I'm starting a new job on October, so I want to put the remaining (to the annual limit) just before April 15.

When Vanguard asks for employer information, what do I put? (Currently unemployed)

Thanks.

  Gross income.

no, but a few new funds have 0.5% purchase fees. Yes, you can contribute more than once a year, but I believe they have a minimum new investment amount -- its not very high. Depending on the aggregate value of your investments, Vanguard charges a $20/year/fund fee if your don't select paperless statements.

your current employer should be "n/a".

 

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