Retirement Accounts and IRA Rules
How is a rollover completed?
1. Direct rollover - If you're getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. No taxes will be withheld from your transfer amount. 2. Trustee-to-trustee transfer - If you're getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from your IRA to another IRA or to a retirement plan. No taxes will be withheld from your transfer amount. 3. 60-day rollover - If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan (see below), so you'll have to use other funds to roll over the full amount of the distribution.
What is a 401(k) Plan?
A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. •Elective salary deferrals are excluded from the employee's taxable income (except for designated Roth deferrals). •Employers can contribute to employees' accounts. •Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).
What is a 403(b) Plan?
A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees' accounts.
What is a ROTH IRA?
A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to a traditional IRA. • You cannot deduct contributions to a Roth IRA. • If you satisfy the requirements, qualified distributions are tax-free. • You can make contributions to your Roth IRA after you reach age 70 ½. • You can leave amounts in your Roth IRA as long as you live. • The account or annuity must be designated as a Roth IRA when it is set up. The same combined contribution limit applies to all of your Roth and traditional IRAs. Limits on Roth IRA contributions based on modified AGI Your Roth IRA contribution might be limited based on your filing status and income.
What is a SEP?
A SEP is a Simplified Employee Pension Plan. A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP.
What is a SIMPLE IRA Plan?
A SIMPLE IRA plan provides small employers with a simplified method to contribute toward their employees' and their own retirement savings. Employees may choose to make salary reduction contributions and the employer is required to make either matching or non-elective contributions. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SIMPLE IRA). A SIMPLE IRA plan account is an IRA and follows the same investment, distribution and rollover rules as traditional IRAs.
What happens if a non-qualified distribution is made from a ROTH IRA?
A non-qualified distribution from a ROTH IRA is subject to taxation of earnings and a 10% additional tax unless an exception applies.
What are the distribution rules for a ROTH IRA?
A qualified distribution from a Roth IRA is tax-free and penalty-free, provided that the FIVE-YEAR AGING REQUIREMENT has been satisfied AND ONE OF THE FOLLOWING CONDITIONS is met: Over age 59½ Death or disability Qualified first-time home purchase
What are the tax consequences of the One Rollover Rule?
Beginning in 2015, if you receive a distribution from an IRA of previously untaxed amounts: •you must include the amounts in gross income if you made an IRA-to-IRA rollover in the preceding 12 months (unless the transition rule above applies), and •you may be subject to the 10% early withdrawal tax on the amounts you include in gross income. Additionally, if you pay the distributed amounts into another (or the same) IRA, the amounts may be: •treated as an excess contribution, and •taxed at 6% per year as long as they remain in the IRA.
What is the One Rollover Rule?
Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own (Announcement 2014-15 and Announcement 2014-32). The limit will apply by aggregating all of an individual's IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. There are two exceptions: 1. Trustee-to-trustee transfers between IRAs are not limited 2. Rollovers from traditional to Roth IRAs ("conversions") are not limited
When is it advantageous for a spouse to roll the inherited IRA into his/her own IRA?
Choosing this option can be advantageous if: 1. You have not yet reached age 70½ but your spouse had. It enables you to stretch out the tax-deferral of IRA assets by delaying distributions until you reach age 70½. 2. You are over age 59½ and you may want to take distributions. Distributions from your IRA would not be subject to the 10% early withdrawal penalty.
Tradition IRAs - What is the rule for withdrawals prior to age 59½?
Distributions from Traditional IRAs prior to age 59½ are subject to a 10% penalty, in addition to applicable federal and state taxes.
TRUE or FALSE - RMDs are calculated on the total of ROTH and traditional IRAs?
FALSE - If you have both kinds of IRAs, withdrawals from a Roth IRA will not help satisfy your annual MRD requirement for your Traditional IRA.
How is the RMD calculated?
Generally, the amount of the RMD is determined by dividing the adjusted market value of an account as of December 31 of the prior year by an applicable life expectancy factor. You can use the Uniform Lifetime Table to find your life expectancy factor to help determine what you'll be required to withdraw.
When must the first RMD be taken from an INHERITED IRA?
Generally, you must begin taking RMDs for Inherited IRA assets BY DECEMBER 31 OF THE YEAR AFTER THE YEAR OF THE ORIGINAL OWNER'S DEATH.
What is the Five-Year Rule regarding ROTH IRAs?
If the original account owner died prior to age 70½, you may choose to elect to use the five-year rule. Generally, this rule applies if the original owner died before April 1 of the year following the year the original owner would have turned age 70½. If you take advantage of this rule, you do not have to begin taking MRDs in the year following the year of the original owner's death. UNDER THE FIVE-YEAR RULE: * You can withdraw from your inherited IRA assets at any time, in any amount. * You must withdraw all assets by December 31 of the fifth anniversary year following the IRA owner's death. As long as the account is depleted within this timeframe, the RMD penalties can generally be avoided. HOWEVER: Under the five-year rule, assets you withdraw will be included in your ordinary income and are taxable as such.
How are RMDs calculated if the spouse rolls the inherited IRA assets into his/her own IRA?
If you choose to roll over the assets into your own IRA, you would base the timing and calculation on your own age using the IRS Uniform Life Expectancy Table. The table assumes that distributions would extend over two lives: yours and a beneficiary 10 years younger than you. With this option, your RMD would be lower than if you transferred your assets to an Inherited IRA.
What is the rule for an INHERITED ROTH IRA?
If you inherit a Roth IRA and transfer the assets to an Inherited Roth IRA, unlike the original owner, you must take MRDs. As long as the assets have been in the Roth IRA for five or more years, these MRDs can be withdrawn federally tax-free.
When would it be disadvantageous for a spouse to roll the inherited IRA into his/her own IRA?
It would not be advantageous to roll the inherited IRA into the spouse's own IRA if the spouse is under age 59½, and intends to take a distribution from his/her IRA. He/she would be subject to the 10% early withdrawal penalty in his/her own IRA but would not be subject to this penalty on an Inherited IRA.
How are MRDs taxed?
MRDs are taxed as ordinary income for the tax year in which they are taken and will be taxed at your applicable individual federal income tax rate. MRDs may also be subject to state and local taxes. If you made non-deductible contributions to your IRA, you must calculate your MRD based on the total balance, but your taxable income may be reduced proportionately for the after-tax contributions.
What is the penalty for failing to take the RMD?
Penalties for taking less than your RMD after 70½ can be severe—up to 50% of the amount that should have been withdrawn.
Traditional IRAs - What is the rule for distributions between age 59 1/2 and 70 1/2?
Starting at age 59½, one can begin taking money out of their retirement accounts without penalty. They will have to pay any federal or state taxes that might be due.
Traditional IRAs - What is the rule for distributions at age 70 1/2 and older?
Starting at age 70½, owners of Traditional IRAs must begin making withdrawals, also known as minimum required distributions (MRDs), from their accounts. These withdrawals are mandatory and violations incur severe penalties.
TRUE or FALSE: Spouses have a choice to make that other beneficiaries do not have when inheriting an IRA?
TRUE - a SPOUSE can roll over the assets into his or her own IRA, or they can also transfer the assets into an Inherited IRA, as all other beneficiaries can. Depending on which option they choose, different RMD rules apply.
TRUE or FALSE? There are no RMDs required for ROTH IRAs?
TRUE.
What is the RBD?
The RBD is The Required Beginning Date, or April 1st of the calendar year after the calendar year in which the participant reaches age 70 1/2.
What is the Rule for MRDs from INHERITED IRAs?
Which rules governing MRDs apply to a person depend on the person's relationship to the deceased original owner. The relationships fall into three categories: 1. Spouse inheritors 2. Non-spouse inheritors, such as son, daughter, brother, sister, or friend of the original owner 3. Entity inheritors, such as a trust, estate, or non-profit organization
Are there any automatic waivers of the 60-day rollover period?
YES - The IRS waives the 60-day rollover requirement automatically only if ALL of the following apply: 1. The financial institution receives the funds on your behalf before the end of the 60-day rollover period. 2. You followed all the procedures set by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan). 3. The funds are not deposited into an eligible retirement plan within the 60-day rollover period solely because of an error on the part of the financial institution. •The funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60-day rollover period. •It would have been a valid rollover if the financial institution had deposited the funds as instructed. If you do not qualify for an automatic waiver, you can apply to the IRS for a waiver of the 60-day rollover requirement.
Traditional IRAs - Are there any circumstances in which IRA funds may be distributed after age 59 1/2 with NO PENALTY?
YES - There are five circumstances in where a person may be able to avoid the penalty on early withdrawals: 1. First-time home purchase 2. Qualified education expenses 3. Death or disability 4. Unreimbursed medical expenses 5. Health insurance, if you're unemployed
When must you take the first RMD from your IRA?
You generally have until April 1 of the year following the calendar year you turn age 70½ to take your first RMD. In subsequent years, the deadline is December 31. MRDs will be required each year for the remainder of your life after 70½.
