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IRAs

 

Traditional IRA

Traditional IRA’s allow investors to grow their investments in a tax-deferred account specifically for retirement. Depending on income levels the contributions made to a traditional IRA may be tax deductible (see IRA limits/tables). Distributions taken prior to age 59 1/2 will be subject to a 10% penalty; unless the distribution is used for one of the following:

  • Expenses for secondary education
  • First $10,000 attributed to the purchase of a first home
  • Systematic Withdrawals (see Rule 72t)
  • Expenses exceeding 7.5% for medical purposes, death, disability, and health insurance if the individual has been unemployed for 12 consecutive weeks.

An IRA owner must start to take Required Minimum Distributions at age 70 1/2. (see RMD table)

Roth IRA

The Roth IRA was created by the 1997 Taxpayer Relief Act and is named after Senator William Roth, Jr.. This IRA was created as an alternative to non-deductible traditional IRA’s. Roth IRA’s offer investors more flexibility than owners of Traditional IRA’s. Although the money contributed to a Roth IRA is not tax deductible, the earnings inside a Roth IRA grow tax free. In a Roth IRA an investor may withdrawal his/her original investment at any time without triggering any taxes or penalties. Earnings distributions are restricted in a similar fashion to that of Traditional IRAs. The Roth IRA does not have any required minimum distributions at age 70 1/2.

Stretch IRA

If the beneficiary is the spouse of the deceased IRA owner, the IRA can rollover into the IRA of that spouse without incurring any taxes. However, if the beneficiary is anyone besides the spouse they may want to consider a Stretch IRA.

The beneficiary (ies) of an investor’s IRA account should be the person or people who would inherit the assets of the IRA account upon the death of the IRA owner. The beneficiary should be one of the following:

  • One Individual
  • Multiple Individuals
  • Qualifying Trust
  • Estate, charity or non-qualifying trust

A Stretch IRA allows the beneficiaries to stretch the income from an IRA. The Stretch IRA requires minimum distributions to be taken over his/her lifetime based on the beneficiaries’ life expectancy. Please consult your tax adviser for more information.

IRA Rollovers

Whether you’re changing jobs or retiring, there are many benefits to consolidating your retirement assets from your former employers’ qualified retirement plan or other IRA’s into one IRA. An IRA may offer you more investment options along with the convenience and ease of tracking your retirement assets on a single statement.

More Information

Required Minimum Distributions

When a Traditional IRA owner reaches age 70 1/2 they are required to start taking distributions from their IRA account. The required beginning date for RMD’s is April 1st the year following the year in which the IRA owner reaches 70 1/2. The IRS Table for RMD’s can be found below:

Example: Brian is a retired 401(k) participant who turned 70-1/2 on March 31. On December 31 of last year, the ending balance in his 401(k) was $262,000. To calculate his RMD for this year, he divides $262,000 by his life expectancy factor of 26.5 years. His distribution amount is $9,886.79.

 

Account balance / Life expectancy factor = RMD
$262,000 26.5 $9,886.79

IRS Uniform Lifetime Table

(Use this table for calculating lifetime RMD’s from IRAs and retirement plan accounts.)

Account Owner’s Age* Life Expectancy Factor Account Owner’s Age* Life Expectancy Factor
70 27.4 93 9.6
71> 26.5 94 9.1
72 25.6 95 8.6
73 24.7 96 8.1
74 23.8 97 7.6
75 22.9 98 7.1
76 22.0 99 6.7
77 21.2 100 6.3
78 20.3 101 5.9
79 19.5 102 5.5
80 18.7 103 5.2
81 17.9 104 4.9
82 17.1 105 4.5
83 16.3 106 4.2
84 15.5 107 3.9
85 14.8 108 3.7
86 14.1 109 3.4
87 13.4 110 3.1
88 12.7 111 2.9
89 12.0 112 2.6
90 11.4 113 2.4
91 10.8 114 2.1
92 10.2 115+ 1.9

*For account owners who turn 70 between January and June, use the life expectancy factor of 27.4 to calculate the RMD. For account owners who turn 70 between July and December, use the life expectancy factor of 26.5.

72t – Equal and Substantial Payments

You may begin receiving distributions from your IRA prior to age 59 1/2 and avoid the 10% penalty by using Rule 72t. The rule allows substantial and equal payments to occur (no less than annually) for a period of 5 years, or age 59 1/2, whichever is longer. The payments must be based on a life expectancy formula set by the IRS. Please consult your tax advisor if you plan to begin a distribution.

Excerpt from www.IRS.gov

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in section 72(t)(1) will not be applicable. Pursuant to section 72(t)(5), in the case of distributions from an IRA, the IRA owner is substituted for the employee for purposes of applying this exception. Section 72(t)(4) provides that if the series of substantially equal periodic payments that is otherwise excepted from the 10-percent tax is subsequently modified (other than by reason of death or disability) within a 5-year period beginning on the date of the first payment, or, if later, age 59 1/2, the exception to the 10-percent tax does not apply, and the taxpayer’s tax for the year of modification shall be increased by an amount which, but for the exception, would have been imposed, plus interest for the deferral period.

IRS Frequently Asked Questions regarding 72t