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   posted: Jun. 26, 2003 @ 11:10a

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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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   posted: Jun. 27, 2003 @ 11:35a

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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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   posted: Jun. 27, 2003 @ 12:12p

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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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   posted: Jun. 27, 2003 @ 3:13p

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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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   posted: Jun. 28, 2003 @ 11:38a

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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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   posted: Jul. 7, 2003 @ 10:44a

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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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   posted: Jul. 15, 2003 @ 11:32p

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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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   posted: Jul. 29, 2003 @ 5:29p

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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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   posted: Oct. 20, 2003 @ 2:43a

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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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   posted: Oct. 27, 2003 @ 10:32p

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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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