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Individual Retirement Accounts: Questions and Answers

If you own an IRA you are probably aware of how confusing these plans can be. A recent change in the rules regarding IRAs has caused many IRA owners to misuse their plans.  Here are some basic questions regarding IRAs and how they may best be used.
 
1. Who can own and IRA and can an IRA be owned if the participant has other retirement plans?

Yes, individuals can contribute to a traditional IRA whether or not they are covered by another retirement plan. However, they may not be able to deduct all of their contributions if they or their spouses are covered by an employer-sponsored retirement plan.

2. How can an individual convert a traditional IRA to a Roth IRA?

A traditional IRA can be converted to a Roth IRA by a rollover. The participant has 60 days to complete the transfer and the participant may have the funds in their personal position during the 60 day period. Other methods include:

Trustee to trustee transfer where one financial institution (custodial) transfers to another custodial and each custodial will provide the necessary paperwork to make this transfer.

Same trustee transfer is done in house by changing the IRA to a Roth IRA.  The custodial does all paperwork and completes the transfer in house.

Converting an IRA to a Roth IRA will cause a taxable event and the tax liability will be reported to the IRS.

3. Can an IRA accept rollovers from a qualified retirement plans?

Yes, providing the originating plan documents allow for the transfer.  A simple call to the benefits department of your qualified plan will provide the answer.

4. How about required minimum distributions? Must distributions be made to IRA participants who are over age 70 ½?

Yes, the IRS requires distribution beginning at age 701/2 and there are no exemptions. 

5. How much must be taken out of an individual’s IRA at age 70 1/2?

Required minimum distributions apply each year beginning with the year the account owner turns age 70 1/2. According to the IRS the formula is this: The required minimum distribution for each year is calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy.

6. If an IRA is cashed in before age 59 1/2, what happens is there a penalty?

The IRS allows for funds to be removed prior to age 59 1/2 under certain circumstances without penalty.  The rule is based on providing a specific level income for a specific period of time.  If funds are removed from an IRA under other circumstances, a 10% tax is imposed. Regardless of age, the IRA owner will be required to pay income taxes on the distribution.

Important Notice: If you are considering an IRA or making a change to an IRA, please make certain you fully understand the possible tax issues and other factors that can affect you.  Always consult legal and tax advice before making your final decision.  IRA rules can change and make certain you fully understand all options available to you.