VI.IRAs and Qualified Plans

IRAs Defined

Your IRA involves many choices. If you are leaving a job, retiring, or changing employers, it is time to make decisions regarding your retirement savings. Your options include:

  • Moving the money to a Rollover IRA
  • Leaving it where it is
  • Moving it to your new employer’s plan
  • Taking it in cash
  • Establishing a systematic distribution/required minimum distribution (RMD)

When you choose a Rollover IRA, you will have a wide variety of choices including various investment options. We can guide you through these choices, including:

  • Choosing funds and investments
  • Considering your need for guaranteed income
  • Evaluating if a Roth IRA conversion makes sense for you
  • Determining eligibility to maintain tax-deferred status no matter what type of employer plan your funds were held in
  • Creating flexibility for your beneficiary(ies) and future generations
  • Evaluating company stock distribution options. Depending on the original cost basis, sometimes it does not make sense to liquidate and rollover company stock.
  • Service and advice now and in the future from Marmaras & Smith, LLC.

Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of FINRA website for additional information.

What it all means

Traditional IRA:  an effective way to reduce current tax obligations, a Traditional IRA offers tax-deferred growth potential in which investors can deduct all or part of their contributions from pre-tax income if certain conditions are met.

All or part of your contributions may be tax-deductible, which may reduce your taxable income. Your deductible contributions are taxed only when you make withdrawals in rertirement, when many investors are in a lower tax bracket.

There are no income restrictions for contributing to a Traditional IRA; however, there are specific limitations for deducting the contribution from one’s pre-tax income.

Spousal IRA: A Traditional IRA that is established and funded by someone for their spouse. These plans are typically used when a spouse has little or no income. The contribution limits are the same as for a Traditional IRA.

Rollover IRA: Funds that are transferred or rolled over from an employer-sponsored Qualified Plan, such as a 401(k) Plan, to a Traditional IRA are often referred to as a Rollover IRA.

Conduit IRA: A rollover IRA that holds funds rolled over from a former employer’s Qualified Plan and is not co-mingled with other IRA funds. Some Qualified Plans will accept rollovers back to a Qualified Plan only if the IRA funds are held in a Conduit IRA.

Inherited or Extended IRA: An IRA that allows a non-spouse, second-generation beneficiary to continue to distribute the IRA assets over the course of their lifetime. This is also referred to as a “Stretch IRA.”

Roth IRA: An individual retirement account similar to a Traditional IRA, but contributions are not tax-deductible. Once an IRA owner reaches age 59½, withdrawals from a Roth IRA are tax-free both for contributors and accumulated earnings. There are no required minimum distributions required after age 70½ in a Roth IRA.

Roth Conversion IRA: A traditional IRA that is converted to a Roth IRA. The IRA owner pays income taxes on the value of the Traditional IRA at the time of conversion to a Roth IRA. Taxes are due for the year in which the Roth Conversion occurred.

SEP IRA: A Qualified Retirement Plan that an employer or self-employed individual may establish. Contributions to a SEP IRA are immediately vested for both the owner and employee participant.

Simple IRA: Referred to as a Simple Plan, this is a Qualified Retirement Plan that an employer or self-employed person can establish.  The employer makes either a matching or non-elective contribution to each eligible employee’s account. The employees make salary deferred contributions. The plan works in a similar way to a 401(k) Plan, has lower contribution limits, and is often self administered by an employer.

Glossary of terms

Account Holder: The original owner of the IRA.

Affidavit of Domicile: A document that verifies the residence of a decedent prior to his/her date of death. This form determines legal residency. The affidavit indicates which state statutes will prevail.

Beneficiary: A person or entity–usually designated on the IRA application–entitled to receive IRA proceeds when the account holder dies.

Designated Beneficiary: The person or entity who is determined to be the designated beneficiary of the account by September 30 of the year following the death of the account holder (October 31 for trusts).

IRA: Individual Retirement Account.

Letters of Testamentary: Official document confirming the account holder’s death and the legitimacy of the account, and naming the personal (legal) representative of the estate. Also known as Letters of Authorization.

Life Expectancy Calculations: The life expectancy factor used to calculate the Required Minimum Distribution (RMD) of an Inherited IRA depends on the identity and number of beneficiaries, the age of the original account holder at the time of death, and the type of IRA being inherited.

Lump-Sum Distribution: Total distribution of your share of the assets in the decedent’s retirement account. Typical choices include:

  • Transfer your share of the assets in-kind from the decedent’s IRA to your own new or existing non-retirement account.
  • Liquidate your share of the assets in the decedent’s IRA and request a distribution to your own new or existing non-retirement account.
  • Liquidate your share of the assets in the decedent’s IRA and request a check.

Required Beginning Date (RBD): The date when an IRA holder must begin taking a Required Minimum Distribution is April 1 following the year in which the account holder reaches age 70½.

Required Minimum Distribution (RMD): A dollar amount required to be taken by the original account holder from an IRA at age 70½ and older. Each year, the IRS publishes the factors to be used in the allocation.

Rollover: A reportable, tax-free movement of cash or assets from one retirement plan to another. This can be IRA to IRA or Qualified Plan to IRA.

Separate Accounts: When multiple beneficiaries of an IRA exist, separate accounts for each beneficiary must be established by December 31 following the original account holder’s year of death in order for beneficiaries to have the option of opening an Inherited IRA and receive distributions over each beneficiary’s single life expectancy.

Single Life Expectancy Table: An Internal Revenue Service table used to calculate required distributions after death.

10% Early Withdrawal Penalty: A federal tax penalty assessed on any distribution made from an IRA–before the account holder reaches age 59½—unless it is made due to death, disability, or certain other exceptions.