Frequently Asked Questions
If you would prefer to speak to one of our team members about your question, please contact us at [email protected] or feel free to call our office at 1-866-7500-IRA(472).
What is an IRA (Individual Retirement Arrangement)
An IRA is a tool that many individuals use to supplement their retirement income. These accounts are generally available to anyone who receives taxable earned income throughout the year. For more information on IRAs please see: IRS Publication 590
A Traditional IRA account allows all contributions and profits to be tax-deferred until money is withdrawn. The tax rates of the withdrawal are based on your tax rates and age at the time of the withdrawal.
A Roth IRA is funded with after-tax funds. The advantage to this type of IRA is that, so long as certain requirements are met, withdrawals from a Roth IRA are tax-free, including profits earned.
Simplified Employee Pension (SEP) IRA
A SEP IRA is plan that allows small companies and self-employed individuals to make tax-deductible contributions to their SEP IRA. More information about eligibility can be found at: IRS Publication 590 and IRS Publication 560.
Coverdell ESA (Education IRA)
A Coverdell ESA allows you to create an on-going tax-free educational savings funds for your family. As long as it is used for educational purposes, withdrawals remain tax-free in much the same way as a Roth IRA does. The contributions to this account; however, do not have to consist of the child’s own earned income and can be made as soon as the child is born. For more information see: IRS TAX TIP 2008-59
Why haven’t I heard about this?
A lot of individuals, including some financial experts, are under the misconception that IRA accounts can only invest in stocks, CD’s, and mutual funds. They are not aware that the changes in the IRS and ERISA have allowed broader investment options since 1975. These narrow investment options (stocks, CD’s, and mutual funds) may be right for some-still others prefer the freedom that self-directed qualified retirement plans offer. A truly self-directed retirement plan allows you the freedom to invest in many types of assets that are not prohibited by the IRS and ERISA.
Are there lots of people who have self-directed IRA accounts?
Currently only about 5% of the 46 plus million retirement accounts are held in nontraditional assets. Still this number is expected to grow as they are anticipating more than a trillion dollars to enter the market in the next two years.
Is there a way I can take my 401(k) plan with my former employer and convert it to a self-directed account?
Yes, you can roll those funds over into a self-directed Traditional IRA or a self-directed qualified plan (if you are eligible to have a qualified plan). The best way to get started is to contact your previous employer and find out what their procedures are. Our staff provides personalized service, so please feel free to contact our office about any questions you may have.
How much can I contribute tax-free or tax-deferred?
This depends upon your age and the type of retirement plan you have. For the complete list of contribution limits, please refer to IRS Publication 590 and IRS Publication 560
Is my contribution tax deductible?
In some cases, contributions to a Traditional IRA may be tax deductible. All Roth contributions are taxable. Please consult your tax adviser for details. For more information please see: IRS Publication 590 Section: How Much Can You Deduct?
What should I do if I made an excess contribution to my IRA?
Consult with your tax adviser any time you have a question about excess contributions. The IRS will require you to take a distribution from your account in order to remove the excess. Your tax adviser will help you determine any tax liabilities and/or penalties involved in this situation. For more information please see: IRS Publication 590 Section: Excess Contributions
What do I need to know about distributions?
Required Distribution age is 70 1/2 The year you turn 70 1/2, you must start taking distributions (this applies to all IRA account except the ROTH). Beginning at 70 1/2, you are required to take the minimum distribution (RMD) amount from your IRA. Your tax adviser can help your determine what your minimum distribution amount is. Keep in mind that if you fail to take the minimum distribution amount, you may be subject to substantial penalties. Always consult with your tax adviser if you have questions about distributions. We will issue you a 1099 at the end of the year to show the cumulative distributions value reported to the IRS. Normal distribution age for Traditional IRAs is 59 1/2 At 59 1/2, you may begin to take normal distributions from your account. These normal distributions are taxable at the time of the withdrawal and penalty-free. As with all distributions, you need to complete a Distribution Request form to withdrawal funds from your account. Early distributions before 59 1/2 from Traditional IRAs Distributions taken before age 59 1/2 are subject to tax and sometimes are subject to early distribution penalties. Please consult with your tax adviser before taking an early distribution. For more information please see IRS Publication: Distributions from my Roth IRA You may withdrawal annual contributions tax-free and penalty free by the due date for the tax year in which the funds were contributed. In order for these distributions to be exempt from taxes and penalties – your Roth must be established for 5 years and your distribution must be for one of these reasons:
- You are at least 59 1/2
- Your are disabled and have provided the required supporting documentation
- You are a first-time homebuyer (maximum $10,000 may be withdrawn for this reason)
Is the IRS notified of my transactions?
Yes, we report a summary of your yearly transactions to the IRS via a form 1099-R. We also mail you a copy of the 1099-R by January 31st of each year. Additionally, if applicable, clients also receives a form 5498. We will mail the 5498 to you by May 31st for the preceding tax year. Please consult your tax adviser for questions on how your transactions are reported and/or visit the IRS website www.irs.ustreas.gov.
Are conversions reported to the IRS?
Yes, your conversion from a Traditional IRA to a Roth IRA will be reported on Form 1099-R to the IRS. The value on the form will be reported as the fair market value, determined by a qualified third party of your choice. Taxes will be due on the converted amount. Please consult your tax adviser for questions on how your conversions are reported and/or visit the IRS website www.irs.ustreas.gov.
What is the difference between a transfer and a rollover?
In a transfer, you are simply moving the funds from one institution to another. You never take possession of the assets, there is no tax reporting required, there are no taxable consequences, and there is no limit to the number of transfers you are allowed to do. A rollover is when you take a distribution from your IRA and then return it to another IRA within 60 days. It is also considered a rollover when you move assets from a qualified retirement plan into a Traditional, Roth, or SEP IRA.
What is a Qualified Retirement Plan?
Money purchases, 401K’s, 403B’s, Profit Sharing, Pension, Keogh, ESOP, Defined Contributions, Defined Benefit, and others are considered Qualified Retirement Plans.
Is it possible for me to move funds from my Traditional IRA to a Roth IRA?
Yes, if you meet IRS eligibility requirements, all or part of your Traditional IRA can be converted to a Roth IRA. Please consult your tax adviser for questions on how your conversions are reported and/or visit the IRS website www.irs.ustreas.gov.
Is it okay if I change my Roth IRA into a Traditional IRA?
Yes, changing your Roth IRA to a Traditional IRA is called a recharacterization. A recharacterization may be done as a conversion, a contribution, or both. Both of these IRAs must be established with American IRA to allow us to move the funds. Certain IRS rules and regulations apply. Please consult your tax adviser for questions.
Is it really legal to purchase non-traditional assets using my IRA?
Absolutely Yes! The Employee Retirement Income Security Act (ERISA) provides individuals a chance to direct their retirement funds are invested. Instead of stating what is allowed, the IRS states which investments are not allowed. Under both ERISA and the IRS, there are very few types of investments not allowed (i.e. life insurance contracts and collectibles). For a complete list of what is prohibited, please see the Internal Revenue Code Section 401 (IRC 408(a) (3)).
What’s the difference between a rollover and a transfer?
A rollover is when you have already received the funds from your previous employer or IRA provider and are opening a new account within 60 calendar days. A transfer is movement of funds from one IRA, Roth IRA, SEP, or SIMPLE account to another with the movement being handled by your custodian’s. In a transfer…you do “not” take physical possession of your funds. American IRA, LLC does not offer investment, tax, financial or legal advice to clients. Individuals who believe they need advice should consult with the appropriate professional(s) licensed in that area.