IRA Rules

Archive for April, 2010

Question: Question about the 5 year rule on a Roth IRA account.?

I’m 22 years old and have got into investing. I have about 10,000 that i have been playing around with and would really like to start an Roth IRA. All though I plan on buying a house and going back to school and would like access to the money in the next 5-10 years.

I have been told that if you have money in a Roth IRA that you can take the money out without tax penalties if it has been in the account for 5 years or more.

Can someone explain this to me in better detail. I always thought that you have to wait till you get 59.5 years old to take it out. Please help me thanks

Answer: You do.

You pay no taxes when you make qualified withdrawals after age 59½ and your account has been open at least five years.

Investing & Retirement Funds : IRA Early Withdrawal Rules

Question: what to do when the brokerage firm reported my IRA as a distribution when i rolled it over to a bank?

I wrote a brokerage check directly to the bank I deposited the sep/IRA into and the bank reported the IRA as a rollover and the brokerage firm reported it as a distribution. Now I must pay twice the tax. I have to pay now for the distribution and later when I get the same money out of the bank on the same money?

Answer: It is somewhat puzzling that you posted this as a US tax question from New Zealand. So I will assume that this is a question for USA.

If you wrote a check from one IRA to another qualified account, just because the first reported it as a distribution does not necessarily mean it is taxable now, if it actually went to another qualified IRA within 60 days. Although, it would have been better to have done a direct transfer to remove all doubt about what you did, and to avoid any withholding. When you do your taxes, you will need to note the amount that you rolled over (or properly answer questions if you e-file). If there was any withholding and you did not add that back in from other sources within 60 days, the withholding would be subject to tax (and 10% penalty if under age 59.5).

IRS Publication 590 at irs.gov has all the rules for US IRAs.

Self Directed IRAs Rollover and Conversion by James Smith Seminar Infomercial

A stretch out IRA is a new type of individual retirement account. Specific IRA rules, the stretch IRA rules, apply to stretch out IRA accounts. Some of the stretch IRA rules are discussed here.

Stretch IRA rules on IRA distributions

Upon the death of the IRA owner, the designated beneficiary* must choose an IRA distribution option.

One option for the designated beneficiary could include taking minimum distributions over his or her Life Expectancy, rather than distributing the IRA individual retirement account in a lump sum. If a designated beneficiary, age 49, chooses to take annual minimum distributions over his or her Life Expectancy of 35.1 years, the tax-deferred status of the inherited assets remaining in the IRA could continue for 35.1 years after the IRA owner’s death.

If the designated beneficiary started taking IRA Distributions over his or her Life Expectancy, but were to pass away before the distribution term were completed, the remaining portion of the IRA would go to the designated beneficiary’s estate. The estate could continue minimum distributions over the remaining Life Expectancy of the designated beneficiary. However, most executors want to close estates, not hold them open for 10, 20 or more years. Therefore, executors tend to accelerate the IRA payments and distribute the IRA all at once.

Rather than the inherited IRA going to the designated beneficiary’s estate, the designated beneficiary could name a “remainder beneficiary” who could continue to receive the annual minimum distributions, established by the designated beneficiary, until the end of the original payout term.

Using the example from above, if the designated beneficiary were to pass away after only completing 20 years of the 35.1-year distribution term, the remainder beneficiary could continue the remaining 15 years of annual payments. Instead of distributing the IRA in a lump-sum and paying income taxes on the distribution all at once, the remainder beneficiary could spread the income tax liability from the IRA over the next 15 years.

The remainder beneficiary cannot increase the number of years over which the IRA could be paid. Instead, annual minimum distributions are only re-directed to the remainder beneficiary.

*Designated beneficiaries include living individuals and qualifying, pass-through trusts, but do not include an estate, charities, or certain non-qualifying trusts.