Individual Retirement Account

BS_49168934_957X417Save for retirement as a supplement to Social Security…

Features include:

  • Tax deferred savings.
  • Many terms from which to choose.
  • Roll over existing deferred savings.
  • Fixed or variable rate.

Transfers and Rollovers

The dollars you’ve saved have probably required some sacrifices for the benefit of a more secure retirement. Now that you have those dollars safely in an IRA or another retirement plan, it’s paramount that you protect their tax advantages if you are considering moving them from one kind of plan to another, or simply from one trustee or custodian to another.

Mishandling such asset movements can have potentially disastrous tax consequences. Recent tax court rulings confirm that the IRS generally considers the individual taxpayer — the individual who owns the IRA or the retirement plan account — to be responsible for making the right decisions and taking the right actions, as well as accepting any tax consequences that arise.

Following is a general overview of the options available. For more specific information, consulting with a competent tax advisor is always recommended.

How Can Retirement Assets Be Moved?

The assets in your IRA or employer-sponsored retirement plan – commonly referred to as a qualified plan — can be moved by several different transactions. These are known as:

  • Rollovers
  • Direct rollovers
  • Trustee-to-trustee or custodian-to-custodian transfers.

What Is A Rollover?

A rollover begins with a payout (termed a distribution), followed by re-contribution of all or a portion of the assets to another plan. The payout may be from an IRA, or from a qualified plan. Re-contribution to an IRA or a qualified plan must take place within a 60-day period, or the assets lose their ability to be returned to a tax-advantaged account, and — unless they have previously been taxed — will generally be treated as ordinary income and taxed in the year they are received.

Do Rollovers Require Reporting?

Because a rollover begins with a distribution, the IRS will receive a report showing that the taxpayer received the funds. If the assets are re-contributed to an IRA, a separate report to the IRS will confirm this. If the IRS does not receive such a confirmation, however, it will be presumed that the funds are taxable.

When Is A Rollover Not Possible?

  • A rollover is not allowed in certain circumstances. Prohibited are:
  • More than one same-funds or same-account IRA- to-IRA rollover within 12 months
  • Rollover of after-tax contributions from a qualified plan
  • Rollovers from a SIMPLE IRA plan during the first two years of plan participation
  • After age 70 1/2, rollover of IRA or qualified plan amounts that represent a taxpayer’s required minimum distribution for that year (if this requirement has not yet been met)
  • Rollover from a Roth IRA to a Traditional IRA or qualified plan

With certain restrictions, assets are included in income and taxed, but their future earnings may be tax-free when placed in a Roth IRA, a potentially greater long-term benefit. Our representative may suggest you seek qualified tax advice to learn if this will be beneficial to you.

What Is A Transfer?

In retirement plans, the term “transfer” has a narrower meaning than in everyday communication. A transfer is the movement of plan assets directly from trustee-to-trustee or custodian-to-custodian, with no limitation of one transfer per 1 2-month period, as there is with IRA rollovers. With a transfer transaction, the taxpayer does not have the ability to cash and use the funds. Therefore, the transaction is not considered a distribution to the taxpayer, is not reported and the IRS will not consider the income taxable.

What Is A Direct Rollover?

A direct rollover has some of the characteristics of both rollovers and transfers. A direct rollover:

  • Always originates with assets in a qualified plan.
  • Is a movement either to an IRA, or to another qualified plan.
  • Assets are not cashable or negotiable by the taxpayer.

Are All Assets Eligible For Direct Rollover?

Assets held in most qualified retirement plans are eligible for direct rollover, with certain exceptions, including

  • After-tax plan contributions.
  • Required minimum distributions after age 70½.
  • Certain annuity-like life expectancy payments from a qualified plan.

Is A Direct Rollover A Smart Move?

When assets are distributed from a qualified plan directly to a plan participant, there is generally mandatory withholding of 20 percent of the distribution as a pre-payment of tax liability, even if the distribution is ultimately rolled over to another plan. However, if the qualified plan assets move directly to an IRA or another qualified plan via a direct rollover, this amount is not withheld.

Are Direct Rollovers Reported?

Although a direct rollover is very much like a transfer, it is reported to the IRS like a distribution. A special code on the distribution report alerts the IRS to the fact that the assets were moved via a direct rollover to another IRA or qualified plan, and are not currently taxable.

We Can Help…

Rollovers, direct rollovers and transfers offer opportunities to move your retirement assets to where you want them, while retaining their substantial tax advantages. One of our representatives will be happy to discuss these options with you, and help you complete such a move safely and securely.

Distributions

You’ve worked hard to save money for retirement. You’ve made contributions to your IRA or employer retirement plan, perhaps both. Now the time has come to withdraw some of your retirement funds. It’s time for a distribution.

Understanding when and how withdrawals can or must be taken, and the options available at such times, is vital if a person hopes to make tax-wise decisions regarding their retirement plan assets. For specific details about receiving distributions from a particular type of retirement plan, seeking the advice of competent tax advisor is always recommended.

When I Can Take A Distribution?

Taking a distribution is much easier with IRAs than with most qualified plans. IRA assets are essentially available on demand. Qualified plan assets, on the other hand, generally require that an event-known as a “triggering event”-must occur before assets can be withdrawn. These events differ slightly from plan to plan, but generally include:

  • Plan termination.
  • Separation form service (leaving employment).
  • Death.
  • Disability.
  • Reaching normal retirement age.
  • Reaching age 59½.

Some plans allow withdrawals while still employed, without having a true triggering event. These amounts are known as “in service withdrawals.”

Are There Any Age Restrictions?

 Whether the plan is an IRA or a qualified plan, withdrawing funds before age 59½ generally carries with it an IRS penalty of 10 percent of the amount withdrawn, with certain exceptions.

These exceptions include:

  • Death
  • Disability
  • Payments taken in essentially equal amounts over single or joint life expectancy
  • Distributions taken for certain qualifying medical expenses
  • (for IRAs only) amounts used for health insurance by some unemployed persons, qualifying education expenses, and qualifying first home purchases
  • The new Roth IRAs have additional rules and exceptions. Please to the Roth IRA brochure for more details

Withdrawals after age 59½ are not subject to a penalty tax.

Am I Required To Take Distributions?

Congress’s purpose in creating IRAs and qualified plans was to help make retirement more secure, not to provide tax shelters that would delay taxation indefinitely. Congress therefore established age 70½ as the time when distribution from retirement accounts are generally required to begin.

Such “required minimum distributions”

  • Must be taken annually, generally calculated by dividing plan assets by life expectancy.
  • Must meet or exceed the minimum amount (more can be taken, but not less).
  • Are subject to a penalty tax if not taken is a timely fashion.
  • Exception: Roth IRAs do not have mandatory distributions at age 70½.
  • (NOTE: A law change in 1996 allows employers to offer participants in qualified plans the option to delay distribution until retirement, if they remain employed after age 70½).

How Are Distributions Taxed?

Distributions, plus their tax deferred earnings, are generally included in ordinary income and taxed in the year distributed. However, Traditional IRAs and some qualified plans do allow after-tax contributions. These amounts are not taxed when distributed, but their tax-deferred earnings are.

Are There Options to Reduce My Tax Liability?

Special tax options may apply to certain distributions from qualified plans. If the distribution qualifies, income tax liability may be reduced by using:

  • Five-year income averaging (this ceases to be available as of January 1, 2000).
  • 10-year income averaging.
  • Capital gains tax treatment.

Are There Special Rules For Beneficiaries?

Both IRAs and qualified retirement plans allow the naming of beneficiaries, in the event that the IRA holder or plan participant dies before all assets are paid out.

IRA Beneficiaries

Depending on the age of the IRA holder when he or she dies, and their relationship to the beneficiary, the beneficiary may:

  • Continue or accelerate the scheduled payoff of assets (if distributions have already begun.)
  • Take total payoff
  • Take complete distribution within five years
  • Take distribution over the beneficiary’s own life expectancy
  • Treat the IRA as their own ( an option available only to a spouse)

Qualified Plan Beneficiaries

Qualified plan beneficiaries have somewhat different options. Distributions of qualified plan assets to beneficiaries may generally be received:

  • In annually-calculated required minimum distributions, much like IRAs.
  • In annuity form.

Can Distribution Be Rolled Over?

Distribution from traditional IRAs or qualified plans that exceed amounts needed to satisfy the required minimum distribution rules, may be eligible to be rolled over to an IRA, or to another qualified plan.

For More Information…

For assistance of your Traditional IRA or qualified plan distribution questions, one of our representatives will be happy to assist you.