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Individual Retirement Plans

Traditional Individual Retirement Accounts (IRAs)

Traditional IRAs, which were created in 1974 by the Employee Retirement Income Security Act (ERISA), are owned by roughly 31.1 million U.S. households. The Investment Company Institute reports that there is roughly $7.4 trillion in Individual Retirement Accounts (IRA).1 To help put that in perspective, that’s well over one-third the annual gross domestic product of the U.S.2 There are 2 popular ways that IRA’s can be utilized to save for Retirement. First, individuals who may not have the option to save with an Employer Sponsored Retirement Account can save for retirement and tax deduct those contributions, based on income rules. Or, individuals who have Employer Sponsored Retirement Accounts can rollover those accounts to the IRA after separating from the employer creating a suitcase of investments to take with you.

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How it works

A Traditional IRA is a tax-deferred retirement savings account. You can make after-tax contributions that may be fully, or partially, tax deductible depending on your circumstances. The term tax deferred refers to all dividends, interest and capital gains that are allowed to compound each year without taxes. Once you start saving money in an IRA, you can invest in stocks, bonds, mutual funds, ETFs, and other types of assets. You can buy and sell investments within the IRA; however, if you withdraw (distribute) assets before age at 59 ½ (known as a premature distribution), you will most likely pay a 10% IRS penalty. You also may be subject to federal, state and local income taxes.

Contributions

Rollover IRA’s

Changing jobs can be a tumultuous experience. Even under the best of circumstances, making a career move requires a series of tough decisions, not the least of which is what to do with the funds in your old employer-sponsored retirement plan. Some people choose to roll over these funds into an Individual Retirement Account, and for good reason. About 30% of all retirement assets in the U.S. are held in IRAs, and 87% of traditional IRA owners funded all or part of their IRAs with a rollover.¹,²

Generally, you have three choices when it comes to handling the money in a former employer’s retirement account.

  • First, you can cash out of the account. However, if you choose to cash out, you will be required to pay ordinary income tax on the balance plus a 10% early withdrawal penalty if you are under age 59½ and don’t qualify for an exception.
  • Second, you may be able to leave the funds in your old plan. But some plans have rules and restrictions regarding the money in the account.
  • Or third, you can roll the money into an IRA.

Why do so many people choose an IRA rollover? Here are a few of the major benefits:

  • Rollovers may preserve the tax-favored status of your retirement money. As long as your money is moved through a direct “trustee-to trustee” transfer, you can avoid a taxable event.³ In a traditional IRA, your retirement savings will have the opportunity to grow tax-deferred until you begin taking distributions in retirement.
  • An IRA rollover may open up your investment choices. When you stick with your former employer’s retirement plan, you are typically limited to the investments offered by the plan. With an IRA, you may have a much broader range of choices, giving you greater control over how your assets are allocated.
  • Rollovers can make it easier to stay organized and maintain control. Some people change jobs several times during the course of their careers, leaving a trail of employer-sponsored retirement plans in their wake. By rolling these various accounts into a single IRA, you might make the process of managing the funds, rebalancing your portfolio, and adjusting your asset allocation easier.

An IRA rollover may make sense whether you’re leaving one job for another or retiring altogether. But how your assets should be allocated within the IRA will depend on your time horizon, risk tolerance and financial goals.

1. 2015 Investment Company Factbook

2. Distributions from traditional IRAs and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

3. The information in this material is not intended as tax advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a tax professional for specific information regarding your individual situation. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for

   

Regular Annual Contributions (other than rollovers)

Each year you may contribute up to the lesser of your earned income for that year, or the amount set by the IRS. The maximum you can contribute is based on whether you are age 49 or younger, or age 50 or older, for traditional IRAs. Contributions can be made through April 15 for the prior calendar year. If you qualify, your contributions to an IRA may be tax deductible. To see if you qualify for a deductible IRA, please use our Contributing to an IRA Calculator. For 2016, regular annual contributions to Traditional IRA’s are set at $5,500. Individuals who reach age 50 or older by the end of the tax year can qualify for “catch-up” contributions. The combined limit for these is $6,500. These limits also apply and should be combined with any Roth IRA contributions.

Distributions

IRA Withdrawals that Escape the 10% Tax Penalty

The reason withdrawals from an Individual Retirement Account (IRA) prior to age 59½ are generally subject to a 10% tax penalty is that policymakers wanted to create a disincentive to use these savings for anything other than retirement.¹ Yet, policymakers also recognize that life can present more pressing circumstances that require access to these savings. In appreciation of this, the list of withdrawals that may be taken from an IRA without incurring a 10% early withdrawal penalty has grown over the years. Penalty-Free Withdrawals, outlined below, are the circumstances under which individuals may withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, generally is due on such distributions.

  1. Death — If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into his or her IRA, he or she will forfeit this exception.²
  2. Disability — Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.³
  3. Substantially Equal Periodic Payments — You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.⁴
  4. Home Purchase — You may take up to $10,000 toward the purchase of your first home. (According to the Internal Revenue Service, you also qualify if you have not owned a home in the last two years). This is a lifetime limit.
  5. Un-reimbursed Medical Expenses — This exception covers medical expenses in excess of 7.5% of your adjusted gross income.
  6. Medical Insurance — This permits the unemployed to pay for medical insurance if they meet specific criteria.
  7. Higher Education Expenses — Funds may be used to cover higher education expenses for you, your spouse, children or grandchildren. Only certain institutions and associated expenses are permitted.
  8. IRS Levy — Funds may be used to pay an IRS levy.
  9. Active Duty Call-Up — Funds may be used by reservists called up after 9/11/01, and whose withdrawals meet the definition of qualified reservist distributions.

With a traditional IRA, the account holder must begin taking required minimum distributions (RMDs) by April 1 of the year after he or she turns 70½. These payments are based on the IRS’ tables for life expectancy.

1. With an IRA, once you reach age 70½, generally you are obligated to begin taking required minimum distributions.

2. Your required minimum distribution (RMD) may be based on your age or the deceased’s age at the time of death. Penalties may occur for missed RMDs. Most are required to begin by December 31 of the year following the date of death. Any RMDs due for the original owner must be taken by their deadlines to avoid penalties. You will pay taxes on any distributions you take. Consider speaking with a financial professional who can help you evaluate the potential impact an inheritance might have on your overall tax situations.

3. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Federal and state laws and regulations are subject to change, which may have an impact on after-tax investment returns. Please consult legal or tax professionals for specific information regarding your individual situation.

4. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.