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An Individual Retirement Account (IRA) is an investment tool created
by the U.S. Government's ERISA Act of 1974 to supplement retirement
income. IRAs are generally available to anyone who receives taxable
earned income throughout the year. IRS Publication 590 [PDF - 448.6K]
provides information on determining what types of earned income
are considered taxable. Reference the IRA type you are interested
in for specific rules that may apply. Please contact your tax adviser
for assistance in determining the type of IRA that will best suit
your needs
IRA (Traditional / Contributory or Rollover)
Individuals can set up their own accounts for retirement through
Individual Retirement Accounts (IRAs). The descriptive terms 'Traditional'
or 'Contributory' indicate that the IRA is or has been funded through
cash contributions by the IRA owner, as opposed to a 'Rollover IRA'
that is funded via a 'rollover' of a previous employer-sponsored
retirement account such as a 401(k). While there used to be reason
to differentiate between the Traditional/Contributory IRAs and the
Rollover IRAs so that they could be kept separate, the rules have
relaxed enough to make differentiating unimportant. Knowing which
type of IRA you have has now become more a matter of trivia than
function. What is still important, is whether or not the funds in
your IRA are pre-tax.
Click here to find out more about IRAs
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Established in 1997 and effective in 1998, the Roth IRA is similar
to the IRA except for the way in which it is taxed. Contributions
to a Roth IRA are nondeductible - i.e. made with after-tax funds,
but if certain requirements are satisfied, all withdrawals from
a Roth IRA will be tax-free.
Click here to read more about Roth IRAs and to help you determine whether or not you may be eligible to fund one.
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IRA SEP IRAs were created for self-employed individuals and smaller companies. Employers can make tax-deductible contributions to SEP IRAs for eligible employees. For more information regarding eligibility, reference IRS Publication 590 [PDF] or IRS Publication 560 [PDF]. For tax year 2007, SEP contributions are limited to 25% of your annual income, not to exceed $45,000. For tax year 2008, SEP contributions are limited to 25% and $46,000. Effective for years beginning on or after January 1, 2002, as a result of EGTRRA, the maximum amount of compensation that may be taken into account for various plan purposes is raised to $200,000, with potential COLA increase thereafter in $5,000 increments.
Each year the IRS sets a limit on the total compensation amount that your employer can consider.
Transfers may be made to this account from Traditional, Rollover, SEP or SIMPLE IRAs and qualified retirement plans (401k, 403b, etc.).SIMPLE IRAs must meet the two-year rule.
Click here to find out more about SEP IRAs.
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Previously known as the Education IRA, the new re-named Coverdell Education Savings Account (ESA) is a great way to create an on-going tax-free educational savings fund for your own family. If used for educational purposes, withdrawals remain tax-free like from a Roth IRA. However, unlike the Roth, contributions do not have to consist of the child's own earned income and can be made as soon as the child is born.
Click here to find out more about Coverdell ESAs.
Can I change the beneficiary on my IRA?
Yes, to change the beneficiary(ies), complete an Change of Beneficiary Request Form
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How much can I contribute tax-free or tax-deferred?
In Traditional or Roth IRAs, you can generally contribute up to the maximum limit each year, not to exceed your annual earned income.
For tax year 2007:
If you have no earned income, your spouse may make a $4,000 (or $5,000 for those who have attained age 50) contribution
to your Traditional or Roth IRA as long as the total of both contributions
does not exceed your spouse's total earned income.
For tax year 2008:
If you have no earned income, your spouse may make a $5,000 (or $6,000 for those who have attained age 50) contribution to your Traditional or Roth IRA as long as the total of both contributions does not exceed your spouse's total earned income.
Is my contribution tax deductible?
Contributions to a Traditional IRA may be tax deductible. Consult your tax adviser for details. All contributions to a Roth IRA are taxable
What should I do if I made an excess contribution to my IRA?
Please consult your tax adviser to determine the best course of action when an excess contribution has been made to your IRA. To remove the excess amount from your account, you must complete a Distribution Request Form. Any tax liabilities and/or penalties involved in doing so will need to be determined by your tax adviser.
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With the exception of Roth IRAs, beginning in the year that the IRA owner turns age 70½, distributions must begin. At this time, you have the option of either calculating the required minimum distribution (RMD) amount on your own (or through a tax adviser), or PENSCO Trust will calculate it for a fee.
If you fail to take the required distribution, or take only a portion
of the required amount, you may be subject to substantial penalty.
Consult your tax adviser for assistance in determining the amount
of your required distribution.
Distributions cannot be processed until the total amount requested has settled. All trades have a three-day settlement period during which time the positions (or cash proceeds) may not be removed from the account.
The distribution will remain pending until any trades and/or open orders that affect the requested distribution amount have settled or been cancelled by the account owner.
You will receive a 1099-R shortly after the end of the year showing the cumulative distribution value reported to the IRS. Please contact a tax adviser for additional information regarding any tax liabilities involved when taking early distributions.
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Can I take a normal distribution from my Traditional IRA?
If you have reached the age of 59½, you may take a normal distribution from your Traditional IRA. A normal distribution is a penalty-free, taxable withdrawal. Funds may be removed from the Traditional IRA by completing an IRA Required Minimum Distribution form.
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Can I take an early distribution from my Traditional IRA?
If you are under the age of 59½, you may take an early distribution from your Traditional IRA. Early distributions are subject to taxes and in some cases, an early distribution penalty. Consult your tax adviser for more information on early withdrawal penalties. Funds can be removed from your Traditional IRA by completing an IRA Distribution Request form.
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Can I take a distribution from my Roth IRA?
Roth IRA owners may take a distribution from their Roth IRA assets at any time
by completing an IRA Distribution Request form. Annual contributions may be withdrawn
tax-free and penalty free by the due date for the tax year in which they were contributed.
To take a qualified distribution exempt from taxes and penalties, two requirements must be met:
" Your Roth IRA must be established for 5 years.
And, your distribution must be for one of the following reasons:
- You have reached the age of 59½
- You are disabled and have provided the required supporting documentation
- You are a first-time homebuyer (maximum $10,000).
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Please see PENSCO Trust Fee Schedule for information on IRA fees.
How are my IRA transactions reported to the IRS?
If you remove funds from your account during the calendar year, you will receive a 1099-R form showing the amounts reported to the IRS. These forms are mailed by January 31 for the preceding calendar year.
All funds coming into an IRA are reported to the IRS and also mailed to our clients on Form 5498. Form 5498 covers the period between January 1 and April 15 of the following year. These forms are mailed by May 31 for the preceding tax year.
Direct Transfers are not reported to the IRS and will not show on either of these forms.
If you have any additional questions on how your IRA transactions are reported, please consult your tax adviser, or visit the IRS Web site at www.irs.ustreas.gov.
How will my conversion be reported to the IRS?
The value of your conversion to a Roth IRA will be reported on Form 1099-R from your Traditional IRA. You will need to pay income tax on the converted amount. It will also be reported as a conversion amount on Form 5498 from your Roth IRA. For more information on these forms, consult your tax adviser or visit the IRS Web site at www.irs.ustreas.gov.
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When considering a transfer, keep in mind that there is a difference between a rollover and a transfer.
In a transfer, you never take possession of the assets; it goes
from one institution to another. There is neither tax reporting nor any
tax consequences as a result of a transfer. There are no limits
to the number or frequency of IRA to IRA transfers.
A rollover occurs when: You either take a distribution from your
IRA and return it to an IRA within 60 days, or you move assets from
a Qualified Retirement plan (QRP) into a Traditional, Rollover,
or SEP IRA.
SIMPLE IRAs can only be transferred to another SIMPLE IRA if they
have been established for at least two years. You may want to consult
your tax adviser before transferring your IRA. Certain tax implications
could be involved if it is done incorrectly.
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Can I convert money from my Traditional IRA
to my Roth IRA?
If you meet the IRS eligibility requirements, you may convert a portion or all of your Traditional IRA to a Roth IRA. To process the conversion, we will need a completed Roth Conversion form. If you do not already have an existing Roth IRA at PENSCO Trust, one will need to be established to receive the converted funds from your Traditional IRA. Contact a tax adviser for additional information regarding the tax liabilities involved when converting.
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Can I change my Roth IRA back to a Traditional IRA?
Changing all or a portion of an IRA contribution from one type of IRA to another is called a recharacterization. You may recharacterize a contribution, a conversion or both. In each instance, a completed IRA Recharacterization form is required. In addition, both types of IRAs involved must be established at PENSCO Trust to facilitate the movement.
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What is considered a Qualified Retirement Plan?
The following are designated as qualified retirement plans and
may be transferred to certain types of IRAs: 401(k), 403(b), Money
Purchase, Pension, Profit Sharing, Keogh, Defined Benefit, Defined
Contribution, ESOP and others.
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