Frequently Asked Questions About IRAs
So what is an IRA?
An IRA is an acronym for Individual Retirement Account. They were originally established for individuals who didn’t have access to a company or organizational retirement plan. They have developed into plans specifically adapted to defer tax dollars into a retirement plan for individual use.
IRAs are great tools for moving money out of an old 401(k) plan while still being able to make contributions and remain invested.
When you leave a 401k plan you have three options. You can take the money, but you pay income tax PLUS a PENALTY of 10%. So this is very expensive. You should NOT do this unless you absolutely have no choice, financially.
Second, you can transfer the money to your new employer’s 401k plan if they have one. This is a good option for many. But you don’t have control over the money, if you ever wanted to access it. You would be limited to the loan provisions, if they are offered in your new company’s plan (up to the employer to offer or not).
Third, you can start an Individual Retirement Account (IRA) and put your money into it. You have the right to liquidate in the future if you need to do so. You would still pay the penalty and income taxes. But you preserve the option. Plus you can invest the money in anything you want that is approved by the IRA custodian.
There are different types of IRAs. What is the difference?
There are basically 3 types of IRAs:
- Traditional IRA
- Rollover (or Conduit) IRA
- Roth IRA
If you would like more details about each of the three types, please feel free to call us at (877) 282-4768.
What type do I use to put my company retirement into?
Rollover (or Conduit) IRA.
What are my other options?
You can roll your account value into another company’s 401(k) or other qualified plan, as long as you meet their eligibility requirements (some plans allow for incoming rollovers even before individual eligibility. Check with your new company’s HR Dept)
You can cash out your retirement plan. Know that you will immediately have 20% withheld for taxes. You will be billed later before you file for the year you took a withdrawal, for Early Withdrawal Penalties of Fed 10% and 2.5 % State ( not all states but Cal does have one). You must plan for the penalties owing or will be in arrears to the IRS for unpaid taxes.
What if I have a loan on my 401(k)?
From the time you receive the date of termination or when the letter of termination is mailed to you, you have 30 days to repay the loan in full. If you cannot repay the loan, then the IRS is informed and you are assumed to have taken an early withdrawal, and will be taxed and pay penalties for an early withdrawal on the defaulted portion.
Note: You may not have the amount owing deducted from the balance in your 401(k) account . That money is pre-taxed and the loan repayment is always made with after tax dollars. Thus your loan repayment cannot be deducted from the amount left in your plan.
How do I roll money out of the terminated plan into a new company plan?
First check with your new employer to see if they offer a retirement plan. If you are going to work for a company, it will be a 401(k) plan. These are only used in For Profit Businesses. If you are going to work for the government, if may be a 457G for governmental and municipal or a 403b plans for Not for Profit and 501c3 Corporations.
Be sure to ask if they will accept rollovers to their plans before you are eligible to participate or only with eligibility. THIS IS IMPORTANT.
If they do accept rollovers, then you must fill out an enrollment form for the new plan, choose an investment allocation for the rollover assets, and fill out a new plan beneficiary form. This will set up your account with the new company plan and you will have an account and investment allocation picked out before your rollover assets arrive from your terminated plan. You may not be eligible for your current company’s elected deferrals till you meet their eligibility requirement. But will have already set up your account when it comes time for you to start contributing regularly from your paycheck.
SUMMARY
- Check with current company to see if they accept rollovers
- Fill out enrollment form and choose allocations( investment choice) for your assets to roll into
- Fill out new company beneficiary form
- Fill out paperwork from your old retirement plan to transfer your money into the new plan.
Usually this process takes less than 2 to 3 weeks. Get paperwork done promptly so no lag in time occurs.
What if I don't want to put the money in to my new employer's plan?
A retirement account is meant to defer any taxes owed until you begin to take withdrawals at retirement. Currently, you can begin taking distributions from an IRA at 59½. But you must begin at 70½.
After age 59½ and before age 70½, there are no requirements concerning the size or timing of your IRA withdrawals. During this age range, you may opt at any time to take as much or as little as you wish. Of course, if you have your funds invested in a vehicle that imposes a penalty for early withdrawals or redemptions, you will have to pay those penalties. But these penalties have nothing to do with the IRS early withdrawal penalty. Because there are no withdrawal requirements between the ages of 59 ½ and 70 ½, those in this age group have the ability to time their distributions to maximize tax savings.
Prior to age 59 ½, most withdrawals will be subject to a 10% IRS penalty. This penalty is in addition to the regular tax you will pay due to the withdrawal being included in your income. There are, however, a few exceptions to this so-called premature distribution penalty.
One exception deals with distributions because of death or a qualifying disability. Under either of these circumstances, the penalty doesn’t apply. Two more exceptions have just been added that apply starting January 1, 1997. The first permits penalty-free withdrawals that are used to pay medical expenses in excess of 7.5% of your adjusted gross income and the second allows unemployed persons to access IRA moneys without penalty if used to pay premiums for health insurance for themselves or their families. For years after 1997, you can also tap the IRA penalty-free if the money is used to pay qualified higher education expenses or to pay up to $10,000 of qualified acquisition costs for a principal residence of a first-time homebuyer. These exceptions are hardly ones you will want to count on as ways of tapping your IRA before age 59 ½. However, there is one beneficial way to tap your IRA before age 59 ½ without penalty and it’s called the “substantially equal periodic exception”.
The “substantially equal periodic payment exception” says that if you receive IRA payments at least annually based on your life expectancy (or the joint life expectancies of you and your beneficiary), then the withdrawals are not subject to the 10% penalty. The IRS has tables for determining the appropriate amount of each payment at any given age. While many are touting this exception as a way of reaching your IRA early, you should be aware that it is difficult to change your payment scheme without triggering a recapture penalty, plus interest. For example, if you start a qualifying early payment plan at age 50, but at age 57 you change to a plan that doesn’t qualify, you’ll be liable for the 10% penalty on all of the distributions you received, plus interest.
Even if you change the payment plan after age 59 ½, you may trigger the penalty because the payments must last for at least five years. For example, if qualifying payments start at age 56, they must last until age 61 to avoid the penalty. In this case, however, the penalty plus interest would apply only to the pre-59 ½ withdrawals. As you can see, winding your way through these rules is like walking through a minefield. There are many traps for the unwary. Just remember the basic rules. Before age 59 ½, withdrawals are penalized; after age 59 ½ and before age 70 ½, there are no penalties; and after age 70 ½, there are stiff penalties for failing to withdraw the minimum.
What if I don’t work for any company and have my money in a rollover IRA?
Yes. You always have the right to roll your funds to a plan. Your dollars will stay tax deferred in either vehicle and can move between the 2 as often as your eligibility rules provide for.
What is a Roth IRA and should I consider one?
A Roth is a special IRA that allows you to pay the tax now with NO PENALTY. But you have to keep the money invested in the Roth for 5 years. All of the growth is tax free. In other words, by paying the tax NOW, you avoid ever paying tax on the growth in years to come. You have to qualify for a ROTH. Check with your tax person and see if you do.
Here are the basic guidelines:
If you are single or head of household: you must earn less than $107,000 to fully contribute to a Roth IRA
If you are married filing jointly or a qualified widow(er): you must earn less than $169,000 to fully contribute to a Roth IRA
If you are married filing separately: you must earn less than $10,000 to fully contribute to a Roth IRA.
Are there any issues I should consider before I sign up for an IRA?
We developed EasyIRA for three reasons. First, it provides professional management at a very low fee. Most people cannot afford to hire a professional manager. With EasyIRA, this is not an issue. We provide the highest level of service for less than 1.25% annually, regardless of how much you have in your account.
Second, you have institutional pricing on your portfolio. This is the lowest cost you can achieve for a widely diversified portfolio. The minimums for these funds if you tried to do this yourself are $250,000 and higher.
Third, you have the latest research and investment knowledge working for you in these portfolios. Through Dimensional Funds, you have access to the best minds in the world managing your portfolios.
You need to compare what you would get with other brokerage options you have available. If you make a complete comparison, you will find EasyIRA is the best option, with the lowest costs.