IRA FAQs

What is an IRA (Individual Retirement Account)?

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 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 (Traditonal/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.

Roth IRA

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.

Simplified Employee Pension (SEP) IRA

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 or IRS Publication 560.

Coverdell ESA (Education IRA)

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.

Can I change the beneficiary on my IRA?

Yes, to change the beneficiary(ies), complete a Change of Beneficiary Request Form.

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.

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.

An overview about "Distributions"

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.

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.

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.

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:

What are the fees associated with my IRA?

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 fair market value, determined by a qualified third party evaluator of your choice, 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.

An overview about "Transfers & Rollovers"

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.

Can I move 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. Beginning January 1st, 2010 the current restrictive maximum of $100,000 AGI for conversion eligibility goes away.

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.

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.