How Do I Know If My IRA is Taxable?
IRAs are tax-advantaged investment accounts designed to help you save for retirement. Your age, income and filing status determine whether (and in the case of couples, both partners) can contribute.
Traditional and Roth IRAs allow investors to save for retirement with tax-deferred accounts; however, you should be mindful of IRS regulations concerning prohibited investments.
Taxability
Investment IRAs can be opened regardless of income; however, the maximum contribution limit may depend on whether or not an employer-sponsored retirement plan exists. You may use funds from this account for first-time home purchases or qualified educational expenses – however if withdrawing before age 59 1/2 they will incur taxes and penalties.
Traditional IRAs allow you to contribute using pre-tax dollars and then let earnings accumulate tax-free until you take out a distribution, when they will be taxed as ordinary income by the IRS. Transferring funds between accounts without incurring additional taxes.
If you own a taxable IRA, required minimum distributions (RMDs) must be taken from it each year at least. An RMD is calculated based on your account value divided by life expectancy factor; withdrawals made before age 59 1/2 must also pay a 10% penalty fee.
Required minimum distributions
At a certain age, most retirement account owners must withdraw at least some funds and pay income tax on them, known as a Required Minimum Distribution (RMD). RMD rules apply to traditional, rollover and SIMPLE IRAs as well as most 401(k), 457 plans as well as SEP IRAs and small business profit sharing or money purchase plans.
Calculate Your RMD To determine your Required Minimum Distributions (RMDs), divide your IRA balance at the end of last year by your life expectancy divisor from the IRS Uniform Table for your age, then multiply that result by your account’s taxable portion. RMDs also apply to beneficiaries who inherit an IRA – however if one or both spouses is more than 10 years younger, use the Joint Life Expectancy Table instead, which results in longer life expectancies with smaller withdrawals; those failing to comply may face stiff penalties.
Rollovers
Alternatively, if you are moving funds out of a retirement plan such as a 401(k) or 403(b), consider rolling over the distribution into an IRA. Please be mindful that there may be restrictions when rolling an IRA over; typically you are only eligible to do this once every year and money must be redeposited within 60 days either by direct transfer (electronic) or check issued payable to your new trustee.
If you opt for an indirect rollover, income taxes will be withheld from your distribution and must be deposited into your new IRA within 60 days or be subject to an early withdrawal penalty of 10%. To avoid this hassle and potential tax implications altogether, direct transfer may be the better choice as your financial institution will send the funds directly into your new account, where they can then be invested whether DIY style or via managed account services.
Investment options
IRAs can be great tools for saving for retirement, yet can seem intimidating at first. Finding the appropriate management approach – either managing it yourself or via an expert such as a robo-advisor or human advisor – for your account is crucial in order to meet both your personal needs and goals, risk tolerance levels and desired level of involvement.
Many investors opt to invest in securities backed by the United States government, such as Treasury bills (with short-term maturities of one year or less), Treasury notes (maturities between two and 10 years), or bonds with long-term maturities of over 10 years). Such investments tend to be low risk investments that help mitigate portfolio volatility.
Bankrate suggests investing in mutual funds, exchange-traded funds (ETFs), and individual stocks to diversify your portfolio and lower fees that could derail returns over time. An IRA with competitive commission rates and numerous low-cost investment options could be an ideal way to reduce investment fees over time.
Comments are closed here.