Posts Tagged ‘IRA Rules’

IRA Rollover Mistakes You Cannot Afford to Make

Monday, November 16th, 2015

IRA Rollover Mistakes

There are times when having an IRA can be trickier than anticipated. There are a lot of rules to follow, there are papers that need to be signed, certain accounts that have to be opened, and sometimes it can be intimidating. This is one reason why having an experienced administrator and custodian on your side is so imperative, to help you steer through the (sometimes) bureaucratic ins and outs.

One unexpected trip up that we’re going to be talking about today is rolling over an IRA. Seems like it should be simple, but there are mistakes that could be made that can cause some serious headaches as some of you might already know. And when it comes to IRAs, we are not talking small potatoes; IRAs accounted for about 28% of all U.S. retirement assets, which totaled $19.5 trillion at the end of 2012. And this market is only going to get bigger, because by 2017, Americans will roll an estimated $451 billion into IRAs, making this an $8 trillion marketplace. This is part of the reason that there’s a lot of red tape. This is also why it takes time and patience and know-how. The best way to avoid the headaches is to avoid the potholes to begin with.

The 60 Day Rule

The 60 day rule is one that you will want to be aware of well before you go through an IRA rollover. If you set up the IRA rollover to go through your hands before it goes to another brokerage, then you will be subject to this time limit. If you get the check for the full amount of money and do not get it to the next IRA account within 60 days, it will be treated the same as a cash-out. This means that you will have to pay a penalty of 10% then pay income taxes on the amount. The solution to this is to be sure to make sure that you get the money to your new broker within 60 days to avoid this mistake.

Leaving Assets in a Former Employer’s Retirement Plan

When you leave an employer, you typically have the right to roll over your entire vested balance into an IRA. A few reasons that you should is that you may gain access to a much wider array of investment options through your new employer, or administrator, they may offer attractive services like a gold-backed IRA, or a self-directed IRA, which help to diversify. Also, your beneficiaries may be able to take distributions over their lifetimes, which allows for a longer period of tax deferral that could extend even after your death, and you can avoid the 20% mandatory withholding for distributions if you rollover your retirement plan to an IRA.

Taking the Cash

When you cash out an IRA too early, you will be subject to some serious penalties. For one thing, you will have to pay a 10% early distribution penalty right off the top, then, on top of that, you will also have to pay income taxes on the entire amount. Depending on what tax bracket you’re in, this could be a pretty substantial amount of money that you lose to the government. There is a process for rolling over your IRA without paying taxes, so you should not just tell your IRA provider to send you the cash and you will later find a new IRA to deposit into. You need to have everything planned out ahead of time, this way you can avoid the fees and keep the full amount of your retirement money.

One Year Waiting Period

Another rule that everyone need to be aware of is the one year waiting period, it applies to making multiple rollovers from the same account. So for example, let’s say that you have an IRA and you decide you are going to open another IRA account, and you then rollover part of the money to the new account. Then later that year, you decide that you wanted to open a third IRA account, but if you try to fund the third account from the first account, you would be in violation of the rules, because you have to wait at least one year before you can rollover for a second time from the same account. The solution is to make sure that you wait at least a year before trying to rollover your account again.

Navigating the retirement waters can be a bit tough at times, but with an experienced administrator, like Accuplan, at your side there’s very little that we cannot handle together.

Does Anything Change for Your Retirement After Marriage?

Thursday, November 12th, 2015

retirement marriage

It’s no secret that married couples in the US are eligible for a variety of nuptial benefits, like tax breaks, deductions, estate planning, and so on. But what most people don’t know if that there are retirement benefits as well, and some that single retirement savers are not eligible for. What those benefits are differ depending on what type of retirement plan you invest in, so let’s break them down.

401ks

If both people in a marriage are working and earning income both have a 401k can defer income tax twice as much cash as single people. Couples who are only able to save a limited amount can decide which 401k has the better employer contributions, and focus their savings efforts there, but the ideal situation would be getting matches from both employers. It’s silly to turn down free money. Between 1992 and 2010, married women’s contributions to retirement accounts increased from 20 percent to 38 percent, on average, according to a Government Accountability Office analysis of Federal Reserve data. And among dual-earner households ages 55 to 64 with 401ks or similar types of accounts, women contributed an average of 44 percent of the household’s deposits in retirement accounts.

Individual Retirement Accounts

According to IRS rules regarding IRAs, married couples have different income limits than individuals when it comes to their ability to make tax-deductible IRA contributions if they also have retirement accounts at work, such as a 401K. For example, the tax deduction for traditional IRA contributions is phased out for married couples with a modified adjusted gross income between $96,000 and $116,000, compared to between $60,000 and $70,000 for individuals. An individual who doesn’t have a workplace retirement account, but is married to someone who does have one can claim the tax deduction until the couple’s income is between $181,000 and $191,000. The adjusted gross income phase out range for Roth IRAs is $181,000 to $191,000 for married couples and $114,000 to $129,000 for unmarried individuals.

Social Security

Married individuals have Social Security claiming options that single people don’t, and they can use various strategies to maximize their benefit as a married couple. Spouses are eligible to receive Social Security payments worth as much as 50 percent of the retired worker’s benefit (if it’s more than they would get based on their own work record), and surviving spouses are entitled to up to 100 percent of the higher earner’s benefit. Married individuals can also claim spousal payments and benefits based on their own work record at different times in their lives. For example, a wife claiming Social Security payments based on her own work record might switch to survivor’s payments based on her husband’s work record when he passes away if his payment is higher than the one she is getting. Couples have an advantage in that they can play the game a little bit and try some strategies, a widow’s benefit is going to be based on whatever his final benefit is, so by waiting until age 70, if something does happen to him, she will get that higher benefit. Divorced spouses can get these payments too if the marriage lasted at least 10 years. In contrast, single people or divorced individuals whose marriage did not last a decade can only claim benefits based on their own work record.

Traditional Pension

Traditional pensions generally provide a steady stream of payments over the lifetime of the retiree and are also required to provide payments to a surviving spouse. However, more than a third of married households with pensions opted not to receive a spousal survivor benefit, often to get higher monthly payments, the Government Accountability Office found. But a worker who wishes to opt out of the spousal coverage needs written consent from the spouse. Some pension plans also give workers the option to take lump-sum cash payments instead of lifetime payments, which allows them greater freedom to spend or invest the money, but also results in the loss of the security of guaranteed monthly payments in old age.

Author: Tanya

When Withdrawing Funds from your IRA are Penalty-Free

Monday, October 26th, 2015

IRA withdrawal

It’s not uncommon that contributions that workers make to their IRA are prematurely withdrawn. An IRA is intended to supplement income in retirement years, but as the future and some circumstances are often out of our control, an IRA is sometimes used in other ways than retirement.

Should workers need to take funds from their IRA, the money that’s withdrawn may be subject to federal and state taxes, and if the person withdrawing the money is under age 59.5 when this occurs, another early-distribution penalty of 10% may be incurred. The reason the IRS imposes these fees is to deter workers from taking distributions from their IRA early, but there are situations where the IRS will waive early-distribution penalty fees.

Health Insurance

If you lose your job, and subsequently your health insurance (unless your insurance is purchased through HealthCare.gov, or have a private plan outside of the market) and are unemployed for 12 weeks or more, you may use your IRA to pay for purchasing health insurance for yourself, your spouse, or your dependents.

Medical Expenses

If you do not have health insurance and something like an accident or medical emergency should happen, the expenses that go along with a hospital can be financially devastating. You’re able to take distributions from your IRA if your medical expenses are more than your insurance will cover for the year, or if you have no insurance at all.
You’re also eligible to pull money out of your IRA and have medical expenses covered if you have unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income. These exemptions allow you to pull the money out of your IRA without likely incurring the 10-percent early withdrawal penalty.

Your First Home

A penalty-free withdrawal of up to $10,000 ($20,000 for couples) can be taken from your IRA when you’re buying or building your first home. The funds can be used to pay for a down payment, closing costs, taxes, and other fees that go into buying a home.
The IRS sees this home as your first home only if you or your spouse have not owned a home in the last two years. It’s also important to note that this $10,000 is a lifetime limit per individual, meaning that you can’t make this withdrawal every time you buy a house. The $10,000 mark is the absolute limit for the penalty-free homebuyer provision.

College Costs

IRA distributions are allowed to pay for college costs like tuition, fees, books and supplies, and yourself, your spouse, your children or your grandchildren are eligible. Room and board expenses can also be covered for part-time students. It’s important to note that IRA withdrawals for this purpose could possibly reduce eligibility for financial aid for some students, as the IRA funds can be considered income, therefore possibly disqualifying aid. Waiting until the student is in their final year at college reduces the risk of financial aid being withdrawn.

Disability

If a doctor can determine that due to a mental or physical disability, that you’re unable to find work or stay employed, you are eligible for penalty-free distributions from your IRA. One factor though is that the disability must be expected to last the duration of your life, or result in your death. The funds can be withdrawn for any purpose in this circumstance, but make sure that you check with your IRA custodian regarding their policies for handling distributions due to disability.

In the end, most retirement advisors don’t like the idea of early distribution, but there’s no doubt it can be a life-saver in many situations. Even though the above situations are exempt from early-distribution penalties, they still may be subject to federal and state taxes. Speak with your tax professional to determine whether or not certain amounts are taxable.

Author: Tanya