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Most frequent questions and answers related to Individual Retirement Accounts

An Individual Retirement Account (IRA) is the most common type of retirement account. As of 2020, there are over 60 millions IRAs totaling approximately $9.5 trillion dollars. The most common type of IRAs are Traditional IRA, Roth IRA, SEP IRA, and the SIMPLE IRA.

In 2022, the maximum Traditional IRA and Roth IRA contribution amounts is $6,000 or $7,000 if at least age of 50. Those numbers will increase to $6,500 and $7,500 respectively in 2023. The SEP IRA maximum contribution amount is $61,000 for 2022 and $66,000 in 2023, and the SIMPLE IRA maximum contribution amount is $14,000 with a $3,000 catch-up if at least age 50 for 2022.  In 2023, the SIMPLE IRA contribution limit increases to $15,500 and $19,000 is age 50 or older.

In general, if you have income from working for yourself or someone else (earned income), you may establish and contribute to an IRA. For 2023, one may contribute a maximum of $6,500 each year or $7,500 if you will reach the age of 50 by the end of the year.

If you are not covered by an employer’s retirement plan, you may take a deduction on your tax return for your contribution. However, if you are covered by an employer’s plan, your IRA may be fully deductible, partly deductible, or not deductible at all depending on how much gross income you have. Contributions to a traditional IRA are generally tax deductible and subject to the required minimum distribution rules at age 73.

To permit tax-free transfers of retirement savings from one type of investment to another, as well as to increase the portability of qualified plan rights for employees moving from one job to another, Congress included a complicated web of rollover provisions in ERISA.

These provisions cover transfers from one IRA to another, transfers from qualified pension, profit-sharing, stock bonus, and annuity plans to IRAs, and transfers from IRAs to qualified plans. In general, a rollover of retirement funds to an IRA is tax-free. Rollovers can either be direct or indirect. A direct rollover can be done without limit, whereas, an indirect rollover can only be done once every 12 months.

Yes. A rollover form one traditional IRA to another traditional IRA is actually called a transfer and can be done without limit. A transfer occurs between IRAs and a rollover occurs when one of the retirement accounts involved is not an IRA. For example, moving funds from a 401(k) plan to an IRA is treated as a direct rollover, whereas, moving funds between IRAs is called a transfer.

A direct rollover occurs when money is moved directly from one custodian to another. The retirement account holder does not have access to these funds. The privilege of rolling over from IRA to IRA directly can be done as many times as one wishes without any limit.

Whereas, in the case of an indirect rollover, the custodian will transfer the funds directly to the retirement account holder. You would then have sixty (60) days to re-contribute the funds to an IRA or other retirement plan. Any funds not contributed will be treated as a taxable distribution. An indirect rollover can only be done once every twelve months for all your IRAs.

Yes, but only if there is a plan triggering event. In general, you need a triggering event to roll funds out of a 401(k) plan, which typically consists of one of the following: (i) you are over the age of 59 1/2, (ii) you leave your job, or (iii) the company terminates the plan.

If funds are rolled directly from a 401(k) plan to an IRA there is no tax or penalty. However, an indirect rollover of funds from a 401(k) plan to an IRA could be subject to a 20% withholding tax.

Yes. A pretax IRA can be rolled to an IRA tax- and penalty-free. One should consult with the 401(k) plan administrator to confirm the plan documents accepts rollovers.

The IRA custodian is required to report the value of the IRA and other details to the IRS each May using IRS Form 5498. The form is filed by the IRA custodian and not the IRA holder.

The IRA custodian is also required to file IRS Form 1099-R in the case of distributions. Whereas, the IRA owner is required to report IRA contributions or distributions on their individual income tax return (IRS Form 1040).

Yes. You are permitted to take money from your IRA so long as you deposit it into another IRA or back into the same IRA account within 60 days. This is known as an indirect rollover and can be done only once every 12 months for all your IRAs in aggregate.

*If the cash comes out of your IRA, it must go back in; you cannot buy stock with the cash taken out of an IRA and then try to deposit the stock into the IRA.

There is generally no limit or restrictions on when an IRA owner may take a distribution from his or her IRA, although there may be adverse tax consequences, such as income tax and/or an additional tax on early distributions.

However, pursuant to IRC Section 72(t), there are certain instances where the IRS allows certain IRA distributions that qualify as “hardship” distributions to be exempt from the additional tax on early distributions.

The most common type of IRA hardship distributions are: (i) Substantial equal periodic payments, (ii) qualified first-time home buyer (up to $10,000), (iii) qualified higher education costs, and (iv) health insurance premiums.

If you take money out of a qualified plan or IRA before you reach the age of 59 1/2, your withdrawal is called an early distribution, and you will have to pay a 10% early distribution tax on the money unless you can meet one of the following exceptions:

  • you die
  • you become disabled
  • if you choose to take substantially equal periodic payments
  • if you withdraw the money to pay medical expenses (the tax exemption only applies to the portion of your medical expenses that would be deductible if you itemized deductions on your tax return)
  • if you withdraw the money to pay child support or alimony
  • if you use the money to pay a federal tax levy
  • health insurance premiums (this exemption is unique to IRAs and certain conditions must be met)
  • you received unemployment compensation for at least 12 consecutive weeks, you received the funds from the IRA during a year in which you received unemployment compensation or during the following years, the IRA distribution is received no more than 60 days after you return to work
  • higher education expenses (certain conditions have to be met)
  • first home purchase (lifetime distribution limit of $10,000)

Yes. Non-spouse inherited IRAs can be rolled into an IRA without tax or penalty. However, an inherited IRA cannot be rolled into a qualified retirement plan, such as a 401(k) plan.

There is a limit to how much you can contribute to an IRA each year. If you contribute too much, then you have made an excess contribution.

If you withdraw the excess by the time you file your tax return, you will not have to pay an early distribution tax on the excess. You must also withdraw the income earned on the excess while it was in the IRA, and that portion will be subject to an early distribution tax, unless it qualifies for another exception.

Protection for some IRAs came in 2005 through the Bankruptcy Abuse Protection Act. The law provides debtors in bankruptcy with an exemption for retirement assets in qualified plans, qualified annuities, tax sheltered annuities, and self-employed plans.

In addition, the law exempts all assets in an IRA that are attributable to rollovers from a retirement plan described above. If you happen to have a traditional IRA or Roth IRA containing assets that are not attributable to a rollover from some other type of retirement plan (i.e. the assets are from amounts you contributed directly to the IRA), then you will also be allowed an exemption of up to $1 million total for the assets in those contributory IRAs.