I.R.A. Little known facts
IRA to IRA Rollover
You can withdraw funds (any amount) from your custodial IRA
account and use them in any way (penalty free!) for up to
sixty days from constructive receipt, as long as you redeposit
them in the form of cash (only), in a qualified custodial
or trustee IRA account. The only restriction is that you can
only perform this "IRA to IRA Rollover", once per twelve calendar
months per IRA.
Direct Rollover
Since January of 1993, you now have 20% of any qualified
pension plan withdrawal automatically withheld by your employer
for future taxes, when you take a distribution. In addition,
if you do not re deposit the remaining 80% of your withdrawal,
PLUS an amount equivalent to the 20% withheld, within 60 days
of constructive receipt of your distribution, you will be
penalized 10% by the IRS on the full 100% (e.g. including
the 20% that was withheld by your employer!).
You can avoid ALL penalties AND the 20% withholding, by establishing
an IRA account and directing your employer to Directly Rollover
your full (100%) distribution to your IRA.
Non Deductible Contributions
Although you may not be able to deduct your annual IRA contribution
on your personal income tax form, you can still make a NON
DEDUCTIBLE contribution of up to $2,000 to your IRA account.
Although these are after tax dollars, you will not have to
pay taxes on the earnings or the basis (your original contribution
amounts) when you withdraw funds from your IRA! This has an
even greater long term impact on your account earnings because
of the avoidance of higher taxes on savings grown and compounded
over many years in your account.
However, you must keep track of the NON DEDUCTIBLE amounts
and their earnings separately from your tax deductible contributions
and earnings. IMPORTANT NOTE: Because this can be tricky,
it is advisable to set up a separate account for your non-deductible
contributions.
One more point: you still cannot contribute more than $2,000
a year (total non-deductible and deductible contributions
in any combination ($4,000 for families with a non-working
spouse)).
SEP IRAs
If you are self-employed or you have a small firm with a
few employees, you may want to consider a SEP IRA. Employers
or self-employed individuals who establish a SEP IRA can contribute
(tax deductible) up to $22,500 (for 1995) or 15% of A.G.I.
(Adjusted Gross Income) each year in your SEP IRA. That's
because the rules for administrating SEP IRAs are the same
as those for IRAs, as each employee must have an IRA to receive
the employer's contributions.
The only other SEP specific rules deal with employee's required
tenure, income and minimum age for participation, which are
established through a simple two page standard IRS form (form
5305 SEP). If you are interested in opening a SEP or knowing
more about them, simply fill in your request in the comments
section of our request form.
Since there are no additional reporting requirements for
SEP IRAs, the benefits that accrue to SEP IRA participants
are the same as for IRA account holders (e.g. compounded tax
deferred savings). Of course, the SEP IRA participant has
the added benefit of being able to make larger annual contributions.
One other important note: Unlike IRAs, SEP contributions
are not reported to the government by the custodian at this
time.
CONDUIT IRA
A CONDUIT IRA is an IRA that preserves your right to roll
a previous pension or tax sheltered annuity (403(b)) rollover
back to a pension plan or tax sheltered annuity at some time
in the future. For example, let's say you change jobs, and
you receive a distribution from your previous company's retirement
plan.
If you elect to Directly Roll the distribution over to a
CONDUIT IRA at the time of the distribution, AND you do not
add additional IRA contributions to the Conduit IRA, nor merge
the amount rolled over with any other IRA or SEP IRA, you
are permitted to roll your Conduit IRA back to your future
employer's pension plan (subject to the terms of the receiving
company's plan).
Multiple IRAs
Many people are not aware that there is no limit on the number
of IRAs one can have. For example, you could open and maintain
5, 10, or even 100 separate IRAs.
Of course, there are many disadvantages of doing so. You'll
receive up to 12 statements per year for each IRA. If you're
taking your investments seriously, you'll need to examine
each of these and calculate the changes in net gain or loss
across all accounts manually each reporting period.
The overwhelming administrative burden causes many to give
up, usually resulting in poor investment performance due to
neglect. Probably more significant, is the fact that you'll
have multiple IRS filings, custodial fees, and companies to
deal with, not to mention the complications when you start
taking distributions.
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