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
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?
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!
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SeattleNative
Senior Member - 1K
rated:
posted: Jun. 27, 2003 @ 11:35a
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?
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.
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?
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.
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.
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.
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?
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?
<< 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. >>
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.
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.
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.
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.
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).
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.
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.
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.
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.
<< 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.
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.
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?
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...
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?
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.
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.
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.
careful said: I have no certification of any kind that would qualify me to advise you, so please take the following suggestion as my layman's opinion, which I offer just as ideas that you can check out with someone who is qualified to advise you. Also, I am assuming here that your goal is approximately to recreate the financial arrangement you had prior to being laid off.
1. Pay off the the 401k loan. 2. Roll the 401k into a traditional IRA, preferably by trustee-to-trustee transfer. 3. Create a new 401k under your LLC. Alternatively, you might be able to do this under yourself if you don't want to use your LLC if you have some other activity that could be considered a sole proprietorship, even if it has not yet generated revenue. TD Ameritrade and E-Trade both provide forms to create self-directed solo 401k's for free, and have language in those forms allowing participant loans. 4. Roll the new IRA into the new 401k. 5. Borrow the money back out from your new 401k when you need it, but not before, because, if I recall correctly, 401k's, IRA's and maybe HSA's too, are safe from creditors and bankruptcy.
I think you might be able to transfer directly between 401k's, avoiding the traditional IRA, but I'm not sure.
I believe there is a one year delay from paying off a 401k loan until the time when those funds are available again to qualify you for making a new 401k loan, but I suspect that that does not apply in this case, since the loans would be from different 401k's and different employers.
Thanks Careful, your advice makes much sense and like your name implies I'll be careful! Pain in the butt to put the money back and then potentially pull it back out but it is what it is.. much better than paying $3-4k in penalty and taxes
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