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IRA Basics

IRA FAQ

IRA FAQ

What is an Individual Retirement Account(IRA)?

An Individual Retirement Account (IRA) is the most common type of retirement account.  As of 2018, there are approximately 50 millions IRAs totaling approximately $9.4 trillion dollars.  The most common type of IRAs are Traditional IRA, Roth IRA, SEP IRA, and the SIMPLE IRA.  In 2019, the maximum Traditional IRA and Roth IRA contribution amounts is $6,000 or $7,000 is over the age of 50.  The SEP IRA maximum contribution amount is $56,000 and the SIMPLE IRA maximum contribution amount is $13,000 with a $3,000 catch-up if over the age of 50 for 2019.

What is a Traditional Contributory IRA?

In general, if you have income from working for yourself or someone else (earned income), you may establish and contribute to an IRA. For 2019, one may contribute a maximum of $6,000 each year or $7,000 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 70 1/2.

What is a Rollover IRA?

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

Can I rollover funds from a Traditional IRA to another Traditional IRA?

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.

How many times can I do a rollover?

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 IRA custodian will transfer the funds directly to the IRA holder.  The IRA holder would have sixty (60) days to re-contribute the funds to an IRA or other retirement plan.  An indirect rollover can only be done once every twelve months for all your IRAs.

Can I rollover funds from a qualified plan (401(k) Plan) to a Traditional IRA?

Yes if there is a plan triggering event.  In general, you need a triggering event to roll funds out of a 401k 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.  Whereas, an indirect rollover (the funds are sent to the individual plan participant directly and not the IRA custodian) of funds from a 401(k) plan to an IRA could be subject to a 20% withholding tax.

Can a Traditional IRA be rolled into a Qualified Plan (401(k) Plan)?

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

Can I rollover a Traditional IRA I inherited?

Yes.  Non-spouse inherited IRA 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.

What reporting requirements exist for Traditional IRA holders?

The IRA custodian is required to report the value of the IRA and other details to the IRS each May using the Form 5498.  The form 5498 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).

Are any amounts withheld by the custodian on payment of a distribution from a Traditional IRA?

Generally No.  The IRA holder may elect to not have tax withheld on an IRA distribution.

What is a Simplified Employee Pension (SEP)?

A Simplified Employee Pension (SEP) is a special type of IRA that can be established by your employer or by you, if you are self-employed. Designed for small businesses, SEPs have many of the characteristics of qualified plans but are much simpler to establish and administer.  For 2019, the maximum SEP IRA contribution is $56,000.  Contributions to a SEP are deductible and subject to the required minimum distribution (RMD) rules.

How do I set up a SEP?

A SEP is established by adopting a SEP agreement and having eligible employees establish SEP-IRAs. There are three basic steps in setting up a SEP, all of which must be satisfied. A formal written agreement must be executed. This written agreement may be satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. IRA Financial Group will help you establish a self-directed SEP IRA with IRA Financial Trust Company, a self-directed IRA custodian.

If an employee participates in his or her employer’s retirement plan, can he or she set up a SEP for self-employment income?

Yes. A SEP can be set up for a person’s business even if he or she participates in another employer’s retirement plan.

Can I rollover a SEP into a Self-Directed IRA LLC?

Yes. One can rollover SEP IRA funds tax-free to an IRA, either directly or indirectly.  Note – an indirect rollover can only be done once every 12 months and occurs when the funds are sent to the IRA owner directly instead of the IRA custodian.  The IA owner than has 60 days from receipt to send the funds to the IRA custodian or it will become taxable and subject to penalty if the IRA owner is under the age of 59 1/2.

What is a SIMPLE IRA?

A Simplified Incentive Match Plan for Employees, or SIMPLE IRA, is designed to make it easier for small employers (those with 100 or fewer employees) to establish a retirement plan. A SIMPLE IRA, like a 401(k), allows employees to divert some amounts of compensation into retirement savings. As with a SEP, contributions to a SIMPLE IRA are deposited into a separate IRA for each participating employee. The participant may select any percentage of compensation to defer into the plan – even zero – but the total dollar amount cannot exceed $13,000 per year ($16,000 if you are at least age 50 by the end of the year).

Can I rollover a SIMPLE IRA into a Self-Directed IRA LLC?

Yes. One can rollover SIMPLE IRA funds tax-free to an IRA, either directly or indirectly.  However, the SIMPLE IRA must be opened at least 2 years before it can be rolled over to an IRA or a 401(k) plan.  Note – an indirect rollover can only be done once every 12 months and occurs when the funds are sent to the IRA owner directly instead of the IRA custodian.  The IRA owner then has 60 days from receipt to send the funds to the IRA custodian or it will become taxable and subject to penalty if the IRA owner is under the age of 59 1/2.

Can I use my IRA funds for a short-term loan?

Yes.  You are permitted to take money from your IRA as long as you deposit it into another IRA, or back in the same IRA, within 60 days – this is known as an indirect rollover and can be done only once every 12 months for all your IRAs in the aggregate. Note: if cash comes out then cash must go back in – you cannot buy stock with the cash taken out and then try to deposit the stock into the IRA.

How many Rollovers am I allowed each year?

In the case of a direct rollover, which is when one moves IRA funds from one IRA custodian to another, this can be done without limit during the year.  Whereas, in the case of an indirect rollover, the IRA custodian will transfer the funds directly to the IRA holder.  The IRA holder would have sixty (60) days to re-contribute the funds to an IRA or other retirement plan.  An indirect rollover can only be done once every twelve months for all your IRAs.

 

Am I allowed to borrow money from my IRA?

No. You are not permitted to borrow money from an IRA. There are no exceptions. If you borrow any amount from your IRA, the entire IRA is disqualified and all assets are deemed distributed. The distribution will be subject to income taxes and perhaps other penalties as well.  However, you can do an indirect rollover which will give you 60 days to use the funds without tax or penalty.  However, an indirect rollover can only be done once every 12 months for your IRAs in the aggregate.

Is there such thing as hardship distributions for an 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 Internal revenue Code Section 72(t), there are certain instances where the Internal Revenue Service (“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.

What happens if I take money out of my Qualified Plan or IRA prior to reaching 59 and 1/2?

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 are age 59 1/2
  • you die
  • you become disabled
  • if you choose to take substantially equal periodic payments
  • if you are at least 55 years when you leave the job (this rule does not apply to IRAs)
  • 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 such as the distributions are used to pay for tuition, fees, books, supplies, and equipment, the expenses are paid on behalf of the IRA owner spouse, child, or grandchild, and the distributions do not exceed the amount of the higher education expenses)
  • first home purchase (lifetime distribution limit of $10,000, the IRA distribution must be used for the acquisition, construction, or reconstruction of a home, the funds must be used within 120 days of receipt, the funds must be used to purchase a principal residence for a first-time home buyer, the first time home buyer must be the IRA owner, or the owner’s spouse, or an ancestor)

What happens if you contribute too much to your IRA in a year?

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.

SIMPLE IRAs and early distributions

All of the special IRA rules for early distributions apply to SIMPLE IRAs, but there is one additional rule. If you are a participant in a SIMPLE IRA and receive a distribution within 2 years of the date you began contributing to it, the early distribution tax increases from 10% to 25%. At the end of 2 years, it falls back to 10%.

How can I use Substantial Equal Periodic Payments to escape the early distribution tax?

The Substantial Equal Period Payments provide an exception to the early distribution tax. Under the Substantial Equal Periodic Payments method, you do not have to pay the early distribution tax on money that you take out of your plan in regular payments over either your life expectancy or the joint life expectancy of you and your beneficiary even if you are younger than 59 and 1/2. The following are some basic rules about the exception:

  • There are no age restrictions.
  • The payments must be substantially equal, which means you cannot alter the payments each year.
  • You must compute the payments as though you intend to distribute the retirement plan over your entire life or over the joint life of you and your spouse.
  • You may not discontinue payments or alter the computation method for at least 5 years and if you have not reached age 59 1/2 at the end of the 5 year period, you must wait until you reach that age before making a change.

When am I required to take distributions from my Traditional IRA or 401(k) during my lifetime?

In general, to avoid being penalized for delaying distributions, you must comply with what are called the required distribution rules. Those rules require that you take a minimum amount from your retirement plan each year, beginning in the year you retire if you turn 70 1/2 or, under certain circumstances, in the year you retire. In general, you may withdraw everything by your required beginning date, or RBD, which for most people is April 1 of the year after turning 70 1/2. Alternatively, you may distribute your retirement plan money over a period of years. Most people will use the Uniform Lifetime Table to determine the number of years over which they may spread distributions. If your spouse is your beneficiary and is more than ten years younger than you are, you will be required to use a different and more favorable table called the Joint Life and Last Survivor Table. Note: A Roth IRA holder is not required to take minimum distributions like an owner of a traditional IRA.

Can I convert a Traditional IRA to a Roth IRA?

Beginning in 2010, the modified Adjusted Gross Income (“AGI”) and filing status requirements for converting a Traditional IRA to a Roth IRA are eliminated. In other words, there are no longer any income restrictions for making Roth IRA conversions.  Note – tax is due on the amount of the cash or fair market value of the asset being converted to Roth.  However, the 10% early distribution penalty would not apply.

What are some tax advantages of an IRA?

Two tax advantages of an IRA are:

  1. Contributions you make to a pre-tax IRA may be fully or partially deductible, depending on which type of IRA you have and on your circumstances. Whereas, contributions to a Roth IRA are after-tax and not deductible.
  2. Generally, amounts in your pre-tax IRA (including earnings and gains) are not taxed until distributed. This is known as the power of tax-deferral.  Whereas, in the case of a Roth IRA, so long as the Roth IRA has been opened and funded for at least five years and you are over the age of 59 1/2 at the time of the distribution, all Roth IRA distributions would be tax-free and penalty free.  This is known as a qualified Roth IRA distribution.

Is there an age limit on when I can set up and contribute to a Traditional IRA?

Yes – You must not have reached age 70 and 1/2 by the end of the year.  Note – in the case of a Roth IRA, there is no age limit for making Roth IRA contributions.

Who can set-up a Traditional IRA?

You can set up and make contributions to a Traditional IRA if you (or, if you file a joint return, your spouse) received taxable compensation during the year AND you were not age 70 and 1/2 by the end of the year.

If I earn more than $6,000 in 2019 ($7,000 if I am 50 or older by the end of 2019), is there a limit on how much I can contribute to a Traditional IRA?

Yes. For 2019, you can contribute to a traditional IRA up to $6,000 OR $7,000 if you are age 50 or older by the end of 2019. There is no upper limit on how much you can earn and still contribute.

If I earn more than $6,000 in 2019 ($7,000 if I am 50 or older by the end of 2019), is there a limit on how much I can contribute to a Roth IRA?

Yes. For 2019, you can contribute to a Roth IRA up to $6,000 OR $7,000 if you are age 50 or older by the end of 2019. However, the amount you can contribute may be less than that depending on your income, filing status, and if you can contribute another IRA.

Can I make less than the maximum Traditional IRA contributions?

Yes. However, if contributions to your traditional IRA for a year are less than the limit, you cannot contribute more after the due date of your return for that year to make up the difference.

When is the due date for making Traditional IRA Contributions?

Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your tax return for that year, not including extensions. For most people, this means that contributions for 2018 must be made by April 15, 2019, and contributions for 2019 must be made by April 15, 2020. Note: Contributions cannot be made to your traditional IRA for the year in which you reach the age of 70 and 1/2 or for any later year.

May I file my tax return before making my contributions?

It is good practice to not file your tax return claiming a traditional IRA contribution before the contribution is actually made.

What are the minimum distribution requirements of a Traditional IRA?

In general, one cannot keep pre-tax retirement funds in a tax-exempt account indefinitely. A retirement account holder generally is required to start taking taxable withdrawals from their pre-tax IRA, SIMPLE IRA, SEP IRA, or qualified retirement plan account (i.e. 401(k)) upon reaching the age age 70½. However, Roth IRAs do not require withdrawals until after the death of the owner or his/her spouse. The required minimum distribution for any year is the retirement account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner. The RMD for any given year is the total account balance in the IRA, or IRAs, as of the end of the immediately preceding calendar year divided by a distribution period.

How do I determine what the minimum annual distribution for a Traditional IRA should be?

The required minimum distribution for any year is the retirement account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner. The RMD for any given year is the total account balance in the IRA, or IRAs, as of the end of the immediately preceding calendar year divided by a distribution period.  For example, assume an IRA holder turns 70 years old in February 2018, and does not have a spouse more than 10 years younger. To determine the RMD for this year (2018), the IRA holder will need to divide the value of each IRA owned as of December 31 of 2018 by the distribution figure found in the appropriate IRS worksheet referenced above. For instance, if an IRA amount at the end of 2018 were $100,000, one would divide $100,000 by 27.4 (which comes from the IRS Uniform Lifetime Worksheet), for an RMD for that IRA of $3,649.64.

What happens if I take my money out of my Traditional IRA before Age 59 and 1/2?

If you take your money out of a Traditional IRA before you reach the age of 59 and 1/2, your withdrawal will be treated as an early distribution and you will have to pay income tax on the withdrawal amount and a 10% early distribution tax on the money. There are some exceptions that may allow the early distribution to escape the 10% early distribution tax, but the exception will not eliminate the ordinary income tax.

Do I have to start taking distributions when I reach a certain age with a Traditional IRA?

Yes. You must begin receiving required minimum distributions by April 1 of the year following the year you reach age 70 and 1/2.

What happens to an IRA Owner’s Traditional IRA after he or she dies?

In general, when an IRA holder dies, the IRA funds can get passed to his or her spouse tax-free.  The spouse would then be able to move the IRA into their name.  This is known as a spousal inherited IRA.  The age of the spouse will determine whether the surviving spouse’s IRA is subject to the required minimum distribution (RMD) rules.  Whereas, in the case of a non-spouse IRA beneficiary, the non-spouse IRA beneficiary would generally have two options for taking RMDs with respected to the inherited IRA: (i) the life expectancy rule and (ii) five-year rule

What happens if a Traditional IRA owner dies after the required beginning date?

If an IRA owner dies on or after his or her required beginning date, the minimum distribution for the year of death is determined as though the owner lived throughout the year, and the applicable distribution periods for subsequent distribution calendar years are generally the owner’s remaining life expectancy as of his or her birthday during the year of death, less one year for each year after the year of death. If an owner has a designated beneficiary, however, the applicable distribution period is the longer of the period based on the owner’s life expectancy or the remaining life expectancy of the designated beneficiary.

What rights does the surviving spouse as sole beneficiary of a Traditional IRA have after the death of a spouse?

A surviving spouse who is sole beneficiary of an IRA and has an “unlimited right to withdraw” from it may, at any time after the owner’s death, elect to treat the IRA as though he or she were its owner, rather than its beneficiary. The election may only be made if the spouse is the only beneficiary of the IRA and is not available if a trust is a beneficiary, even if the surviving spouse is sole beneficiary of the trust.

How are minimum distribution requirements satisfied in the case of multiple Traditional IRAs?

Minimum distributions must be determined separately for each IRA. However, if an individual is owner of more than one IRA, the sum of the minimum distributions from all of them may be satisfied by distributions from any of them. This aggregation rule generally applies only to IRA owners. Also, distributions from Roth IRA or qualified retirement plan cannot satisfy minimum distribution obligations under a traditional IRA.

What do I need to report when making a minimum IRA distribution?

The IRA custodian will report the amount of the required minimum distribution (RMD) to the IRS using IRS Form 1099-R.  The IR holder would report the amount of the RMD on their individual income tax return (IRS Form 1040)

How are distributions from a Traditional IRA taxed?

Distributions from a traditional IRA are taxed as ordinary income, but if you made nondeductible (after-tax) contributions, not all of the distributions will be taxable. In addition, Internal Revenue Code Section 72(t) imposes a tax equal to 10 percent of certain early distributions from IRAs, which generally occur when the distribution occurs prior the age of 59 1/2.

What happens when you take money out of your IRA or 401(k)?

In the case of pre-tax IRA, distributions from a traditional IRA are fully or partially taxable in the year of distribution. If you made only deductible contributions, distributions are fully taxable. Whereas, in the case of Roth IRA, distributions made prior to age fifty-nine and a half may be subject to a ten percent additional tax. Roth IRA rules dictate that as long as you’ve owned your account for 5 years and you’re age 59 ½ or older, you can withdraw your money when you want to and you won’t owe any federal taxes.  For 2019, you can contribute up to $6,000 annually or $7,000 if you are over the age of fifty, based off your eligibility. With a Roth IRA, there are no required minimum distributions (RMDs) for as long as you live. In addition, contributions to a Roth IRA don’t have to stop when you reach age 70 ½, the cut-off for a traditional IRA.

Is a transfer of an IRA incidental to a divorce a taxable distribution?

An individual’s transfer of an interest in an IRA to a spouse or former spouse under a divorce decree or written instrument incident thereto is not a taxable distribution. Following such a transfer, the transferred interest is treated as an IRA of the transferee spouse, maintained for the spouse’s benefit.

What happens if a Traditional IRA is used in a Prohibited Transaction?

If a contributor to an IRA or his or her beneficiary engages in a transaction prohibited by Internal Revenue Code Section 4975 , the account ceases to qualify as of the beginning of the year in which the transaction occurs, and the account balance is deemed distributed at that time. In addition, the IRA holder or beneficiary would be subject to a minimum 15% penalty as well as a 10% early distribution penalty if the IRA holder or beneficiary is under the age of 59 1/2.

Do I have to file a form with the IRS just because I received distributions from a Traditional IRA?

Not unless you have ever made a nondeductible contribution to a traditional IRA. If you have, file Form 8606. However, you would need to report a pre-tax IRA distribution on your individual income tax return (IRS Form 1040).

How much can I contribute to a Traditional IRA if I’m covered by a retirement plan at work?

For 2019, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced/phased out if your modified Adjusted Gross Income (“AGI”) is:

  • More than $103,000 but less than $123,000 for a married couple filing a joint return.
  • More than $64,000 but less than $74,000 for a single individual or head of household.
  • Less than $10,000 for a married individual filing a separate return.

What happens if I inherit a Traditional IRA?

If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. If you inherit a traditional IRA from a spouse, you generally have the following three choices:

  • Treat it as your own by designating yourself as the account owner.
  • Treat it as your own by rolling it over into your IRA.
  • Treat yourself as the beneficiary rather than treating the IRA as your own.

Note: If you receive a distribution from your deceased spouse’s IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution.

What happens if I inherit a Traditional IRA from someone other than a spouse?

If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA and cannot roll the inherited IRA into a 401(k) plan.  In the case of required minimum distributions,  the case of the non-spouse IRA beneficiary would generally have two options for taking RMDs with respected to the inherited IRA: (i) the life expectancy rule and (ii) five-year rule

Can I transfer assets from other retirement programs to a traditional IRA tax free?

Yes. In general, you can transfer tax free, money or property from other retirement programs (including Traditional IRAs) to a Traditional IRA. You can generally make the following kinds of transfers:

  • Transfers from one trustee to another
  • Rollovers
  • Transfers incident to a divorce

What is a Trustee-to-Trustee Transfer?

A trustee-to-trustee transfer is a transfer of funds in your Traditional IRA from one trustee directly to another, either at your request or at the trustee’s request, is not a rollover. A transfer is tax-free and penalty-free.  Because there is no distribution to you, the transfer is tax-free. Because it is not a rollover, it is not affected by the 12 month waiting period required between indirect rollovers.

What is a Rollover?

In general, a rollover is a tax-free distribution of cash or other assets from one retirement plan that you contribute to another retirement plan.  In general, direct rollovers can be done anytime and are tax-free.   Whereas, in the case of an indirect rollover, the IRA custodian will transfer the funds directly to the IRA holder.  The IRA holder would have sixty (60) days to re-contribute the funds to an IRA or other retirement plan.  An indirect rollover can only be done once every twelve months for all your IRAs.

What kinds of Rollovers can I make to a Traditional IRA?

In general, you can rollover amounts from the following plans into a Traditional IRA:

  • A Traditional IRA
  • An employer’s qualified retirement plan for its employees
  • A deferred compensation plan of a state or local government
  • A tax sheltered annuity plan (Section 403 plan)

What happens if the indirect rollover is not completed in the 60 day period?

In the absence of a waiver, amounts not rolled over within the 60-day period after taking an indirect rollover do not qualify for tax-free rollover treatment. You must treat them as a taxable distribution from either your IRA or your employer’s plan. These amounts are taxable in the year distributed, even if the 60-day period expires in the next year. You may also have to pay a 10% additional tax on early distributions.

How do I apply for a waiver of the 60-day period?

If you do not qualify for an automatic waiver, you can apply to the IRS for a waiver of the 60-day rollover requirement. To apply for a waiver, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. This revenue procedure is generally published in the first Internal Revenue Bulletin of the year. You must also pay a user fee with the application. In determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including:

  • Whether errors were made by the financial institution,
  • Whether you were unable to complete the rollover due to death, disability, hospitalization, incarceration, or postal error,
  • Whether you used the amount distributed, and
  • How much time has passed since the date of the distribution.

Are Traditional IRAs protected from creditors in a bankruptcy proceeding?

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.

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