Can I Split My Traditional IRA Into Two Accounts?
Traditional IRAs allow you to save and invest pretax, then withdraw it in retirement tax-free. But there are annual contribution limits, and withdrawals prior to age 59 1/2 may incur taxes.
Traditional IRAs may make sense if you’re transitioning money from workplace retirement plans or your current tax bracket is lower than anticipated retirement taxes.
1. Taxes
Individual Retirement Accounts (IRAs) offer tax breaks for retirement savings. Available to anyone with income – self-employed individuals and small business owners alike – an IRA account can hold various assets like stocks and bonds.
Traditional IRAs allow individuals to deduct contributions and postpone tax liability on investment earnings until making withdrawals upon retirement. Any withdrawal made prior to age 59 1/2 for non-retirement reasons will incur a 10% penalty fee.
Your investment options for retirement savings vary, from traditional IRAs where an online broker provides access to various investments, to more hands-off solutions such as robo-advisors that use automated technology to select and manage investments for less than the fee charged by traditional fund managers. A financial professional can help determine which option would work best in your particular case. IRAs also serve as excellent ways to roll over funds from workplace retirement plans like 401(k), SEP IRA or SIMPLE IRA.
2. Beneficiaries
A Traditional IRA allows you to make pretax contributions that are tax deductible, with taxes on any investments that grow being deferred until withdrawal in retirement. Furthermore, these accounts can also be used as rollover vehicles from workplace plans (401(k) accounts for example).
Beneficiaries associated with splitting an IRA are similar to those in a consolidated account, yet may pose specific considerations. For instance, an account owner might wish to create individual IRA accounts so each beneficiary has control of his or her investment strategy, helping reduce disputes after death.
Note that beneficiaries must carefully plan required minimum distributions (RMDs) in order to manage their tax liabilities and fees and complexity associated with splitting an IRA can add more fees and complexity for each account, such as annual maintenance fees and brokerage commissions that can add up over time and hinder returns.
3. Investments
An Individual Retirement Account (IRA) allows investors to invest in stocks, mutual funds and bank certificates of deposit (CDs). Investment options vary between brokerage firms. To best protect against loss by the Securities Investor Protection Corporation (SIPC), it may make sense for you to open multiple IRA accounts at different firms.
As with any investment decision, carefully considering whether to split up your IRA is in your best interests is key to reaching financial freedom and retirement planning success. Use SmartAsset’s free tool to connect with a certified advisor near your area who could assist in this decision – interview them without incurring additional charges before selecting which advisor will work best. Get started searching now.
4. Withdrawals
Individual retirement accounts (IRAs) are an essential tool in saving and investing, yet when and how they withdraw their money can make a significant impact on taxes and fees.
Withdrawals from an Individual Retirement Account (IRA) are generally taxed at the account owner’s ordinary income tax rate; however, there may be exceptions such as withdrawals made after death of the account holder or in connection with purchasing their first home.
Under certain IRA regulations, it is also mandatory for you to take required minimum distributions (RMDs). RMD amounts are determined based on your account value at year’s end, your life expectancy and an IRS calculation factor.
For you to avoid the 10% early withdrawal penalty, RMDs must begin taking place by age 73 (or later if born post 1955). It may make sense for your situation to split your IRA into two accounts in order to minimize penalties; or one large lump-sum distribution could also work well.
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