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Self-directed IRA
Self-directed IRAs allow individuals to select, either alone or with the advice of a broker or investment
advisor, those investments which they prefer for their IRA accounts. Permitted
investments include not only bank certificates of deposit, stocks, bonds,
and mutual funds, but also real estate, limited partnerships, private placements
and deeds of trust, among others. Through such investments, individuals can
plan their financial future and take advantage of the significant benefits that IRAs offer.
More and more individuals and their advisors are realizing that self-directed retirement accounts are compelling
investment vehicles. IRAs can be the current investment vehicle of choice now as well
as in the future.
PENSCO Trust is one of a limited number of companies which is authorized under the tax laws to provide retirement account custodial services.
Transfers and Rollovers
If an individual desires to move an existing IRA from one institution to another, he or she can accomplish
this by either a transfer or a rollover.
Transfers
A direct movement from one
authorized IRA custodian or trustee to another, upon the request of the IRA owner,
is called a transfer. This is a tax-free and penalty-free transfer of assets from
one IRA to another.
Rollovers
A rollover is also a tax-free movement of funds or property. However, unlike a transfer, a rollover to an IRA may be from a qualified plan, another IRA, a tax-sheltered annuity (403(b)) plan or an eligible deferred compensation (457(b)) plan maintained by a governmental entity. Funds or assets distributed must be returned to the IRA custodian or trustee within 60 days from the day of receipt. (The IRS may extend this 60-day period in certain rare circumstances if the failure to complete the rollover in that time was beyond the control of the IRA owner.) If the rollover is not successfully completed within the required time period, the IRA owner will be subject to taxation and possible penalties.
Transfer Rules
Because the IRA owner does not actually receive the funds or property
when a direct IRA to IRA transfer is executed, a transfer
is not an IRS reportable event and no tax consequences will
result. If funds are involved, the check is made payable
to the new custodian or trustee. Stock or other non-cash
property will be reregistered in the name of the new custodian
or trustee. There is no limit on the number of transfers an
IRA owner may conduct during a year. In addition, partial
transfers are permitted. Once the current custodian or
trustee is presented with a transfer from the successor
custodian or trustee (authorized by the IRA owner), the
transactions are handled by the respective institutions.
Rollover
Rules
IRA to IRA -
The IRA owner should complete a withdrawal form and send it to the IRA
custodian or trustee . The check issued by the custodian or trustee should
be made payable to (or assets retitled in the name of) either the new
IRA custodian or trustee, or the IRA owner for later retitling in the name of the new IRA.
The current custodian or trustee will report this transaction to the IRS
as a distribution because the IRA owner is directly receiving the funds or
assets.
If a rollover is made
from an IRA, another rollover may not be made from that same IRA
for at least twelve months after the rollover distribution is made.
Retirement Plan To
IRA - Under the tax laws, lump sum and certain other types of distributions
from qualified plans, 403(b) plans or 457(b) plans are eligible for rollover
to an IRA. The plan administrator of any such plan will let you know if a
distribution is an eligible rollover distribution.
For an eligible
rollover distribution, an individual can then choose between a
direct or indirect rollover. A direct rollover is much like
a direct IRA transfer, in that funds or assets move directly
from the plan to the IRA in the name of the IRA custodian or
trustee. Amounts which are directly rolled over are not
subject to federal income tax withholding.
Retirement Plan to
IRA Indirect Rollovers - If the individual chooses to have the eligible
rollover distribution paid personally (i.e., not go into an IRA),
the plan administrator is required to withhold 20% from the distribution
for federal income taxes before issuing the distribution. The IRA owner
can still roll over an amount equal to the entire amount of the distribution,
but must make up the 20% withheld with other funds to avoid being subject to
tax (and possible penalties) on the amount not rolled over. Because of this,
indirect rollovers generally are not desirable.
Contributions
and Deductions
Each individual
is limited to making a contribution to the lesser of $3,000
($3,500 if the individual is at least age 50) or the amount
of his or her "compensation." In general, "compensation" is income
you receive from working, such as wages, salary, tips, commissions,
and self-employment income. "Compensation" also includes alimony
or separate maintenance payments received.
The following
are among the types of income which are not "compensation":
- rental income;
- interest and dividend income;
- pension annunity payments;
- deferred compensation;
- income from a partnership
or limited liability company in which you do not provide material income-producing
services.
The deductibility
of IRA contributions for any year can be affected by whether or not
the individual is a participant in a tax-favored retirement plan,
the individual's tax return filing status, as well as the amount of
the individual's "adjusted gross income" for that year. However,
to the extent an individual is not eligible to make a full deductible
contribution for any year, he or she can still make a nondeductible
contribution to an IRA and have the earnings on those contributions
grow on the same tax-favored basis as earnings on deductible contributions.
Spousal
IRA
A spousal IRA enables
an earning spouse to fund an IRA for the other spouse, with certain limitations
on deductions. Up to $6,000 (or $7,000 if both spouses are at least age
50) can be contributed in the aggregate to IRAs for both spouses, although
no more than $3,000 (or $3,500 for a spouse at least age 50) in each IRA.
For example, a working husband could contribute up to $3,000 to his IRA
(or $3,500 if he is at least age 50) and contribute an additional amount
to an IRA for his non-working wife (up to $3,000, or $3,500 if she is
at least age 50).
Among the important spousal IRA conditions are the following:
- the couple must be married;
- at least one spouse must have compensation;
- a joint federal tax return must be filed;
- an IRA must be established for the non-compensated spouse;
- the non-compensated spouse must be under the age of 70 1/2.
A working spouse over
age 70 1/2 can contribute up to maximum allowed ($3,000 or $3,500 depending on age)
on behalf of the non-compensated spouse, if the non-compensated spouse is under
age 70 1/2 and the above requirements are met, even if the working spouse cannot
on account of age contribute to his or her own IRA.
Each spouse must have
his or her separate IRA; both spouses cannot contribute to the same IRA.
If the non-compensated spouse later receives compensation, he or she does
not have to open another IRA for future contributions. Those future
contributions can be deposited in the spousal IRA which has already
been established.
SIMPLE
IRA
A SIMPLE
(Savings Incentive Match Plan for Employees) IRA may be
established by employers with fewer than 100 employees,
provided certain requirements in the tax laws are met.
A SIMPLE IRA is essentially a more limited version of a
401(k) and an expanded version of a SEP IRA.
The structure
of a SIMPLE IRA allows for a mandatory employer contribution
and optional employee deferrals. All contributions must be
made to a SIMPLE IRA, not a regular IRA. Conversely, regular
contributions must not be made to a SIMPLE IRA.
SEP
IRA
A SEP (Simplified Employee Pension)
IRA is an employee benefit plan with compliance and reporting requirements
simpler than those for qualified plans. For that reason, SEP IRAs are
attractive for sole proprietors and small companies. Contributions
(tax deductible to employers) must be made to IRAs because IRAs are
the funding vehicle for SEPs.
Contributions are
limited to 25% of adjusted gross income or $41,000 ($40,000 for 2003),
whichever is less.
SEP participants
can still contribute up to $3,000 (or $3,500 if over 50) to an IRA.
However, because a SEP is an employee benefit retirement plan, an
active participant in a SEP may not be able to deduct non-SEP
contributions.
The employer has until its tax filing date for its business, including any
extensions, to make SEP contributions.
Conduit
IRA
A conduit IRA is an IRA which is funded solely from amounts attributable
to a rollover from a qualified retirement plan, tax-sheltered
annuity (403(b)) plan or governmental eligible deferred compensation
(457(b)) plan and earnings on those amounts.
Recent changes to the tax laws permit plans to accept rollovers from IRAs funded
with any type of before-tax contributions. However, many plans
choose to accept rollovers from an IRA only if the IRA is funded
exclusively with amounts rolled in from one of the plans mentioned
above. For that reason, conduit IRAs are useful because they preserve
an IRA owner's option to roll back funds into a plan that so limits
rollovers from IRAs.
IRA to Plan Rollover
When the IRA owner desires to roll an IRA back to a plan, a distribution may
be made from the IRA custodian or trustee to the IRA owner. The IRA owner
then has 60 days to deposit the amount in a plan to avoid taxation and possible
penalties. (The IRS may extend this 60-day period if the failure to complete the
rollover in that time was beyond the control of the IRA owner.) The IRA custodian
or trustee will treat this rollover as a distribution by reporting it on Form 1099-R.
The receiving plan will report this to the IRS as an incoming rollover contribution.
The rollover can also be made directly from the IRA to the recipient plan. Either way, there
is no mandatory federal income tax withholding, as there may be with distributions
from retirement plans.
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