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The Basics
of IRAs... Page 3
continued
2. Roth IRAs
You may begin withdrawing money from your Roth IRA anytime after age 59 1/2. Contributions
can be withdrawn anytime tax-free, penalty-free, and without restriction.
If you withdraw earnings prior to age 59 1/2 and before five years after your account has
been established, you'll be taxed (and penalized). Earnings can be withdrawn tax-free,
however, if your account has been established for at least five years and you are: age 59
1/2, disabled, dead, or using the withdrawal for a first-time home purchase ($10,000
max).
Neither the contributions or the earnings from a Roth IRA account will be taxed on normal
withdrawal. This is very different from a Traditional IRA.
With the Roth IRA there is no minimum withdrawal schedule. You're not required to tap your
money at age 70 1/2 or any other age. The money can be left in your account and passed on
to your heirs tax-free, unlike Traditional IRAs.
Transfers
As long as you play by the rules, you're allowed to move your IRA among different
investments from time to time. This is something you might do to take advantage of strong
market conditions or as part of an asset allocation strategy. Maybe you need to shift
money simply because you're nearing retirement and want your assets to be held in a more
conservative vehicle such as a money market or treasury bond portfolio.
In either case, you have two options to move your IRA:
- Direct Transfer.
With a direct transfer, you simply instruct your current IRA custodian to send your money
to a new IRA custodian. You sign an application and your new custodian does the rest. The
process takes a little longer (often four weeks) than a rollover but it's well worth it
-- the headaches and possible tax consequences that accompany a rollover are not
part of a direct transfer. There is no limit on the number of transfers you can do per
year.
- Rollover.
With a rollover, you instruct your current IRA custodian to liquidate your account and
send you a check for the proceeds. Be sure you specifically tell them not to withhold any
of the money for income taxes. You have 60 days to "roll" the money to a new IRA
custodian. Miss the deadline and your money becomes a taxable distribution. If you're
under age 59 1/2, you'll also receive a 10% early withdrawal penalty. Rollovers are
allowed once every 12 months for each IRA account that you own. Follow this last rule
explicitly. If you don't, you'll be assessed even more taxes and penalties.
Types of IRAs
Trying to pick the right IRA
can be a daunting task. There are so many factors to consider: adjusted gross income, tax
filing status, retirement plans, future goals, anticipated income tax bracket when you
retire, whether you want a tax-break now or one down the road, etc. We'll review each type
of IRA in detail and try to point out some of the advantages and disadvantages of each --
try to answer some of the tough questions.
Here they are:
SEP-IRA
SIMPLE-IRA
IRA
Master Chart (for a
quick comparison)
IRA Calculators:
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• What
amount am I allowed to contribute?
• Should I convert my IRA
into a Roth IRA?
• Which will
provide the most retirement income?
• What
option is best for estate planning?
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