Jones Wealth Management Group
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IRA Questions and Answers
Question: What do the letters IRA mean?
Answer: IRA is the acronym for Individual Retirement Account? The key word is account, meaning an IRA is not an investment, but one of several types of accounts designed for retirement savings.
Question: What is an Rollover?
Answer: "Rollover" is the term commonly used to describe the transfer of assets (money) from a (former) company retirement plan to another tax-deferred account such as a IRA or the retirement plan offered by a new employer. Rollovers can also be classified as direct or indirect.
Question: What's the difference between a direct rollover and an indirect rollover?
Answer: A direct rollover is a situation where your former company's retirement plan makes a distribution (cashes out) your balance and issues a check payable directly to an IRA provider or a new company's plan. An indirect rollover is a transfer where the distribution is payable to you, minus a mandatory 20% federal tax withholding, and you then deposit the balance into an IRA or your new company's plan.
Question: What are the other types of accounts designed for retirement savings?
Answer: Visually, think of the different types of retirement accounts as different colored umbrellas that are designed to protect your retirement savings from taxes just as an umbrella protects you from rain. For example, an IRA could be a yellow umbrella, a 401(k) is a red umbrella, a TSP (Thrifts Savings Plan) account is green, a pension plan is blue, etc. They are designed to protect you from taxes by deferring taxes until money is withdrawn (taken from under the umbrella).
Ordinarily any interest and/or dividends earned from any investment are taxable in the year in which they are paid. However, if that interest or dividend is earned while it is in one of these tax-deferred accounts (under the umbrella), it isn't taxed until it is withdrawn from the account.
Question: When I roll over my retirement account, what does it go into and what does it pay?
Answer: A financial institution serves as your IRA custodian or trustee. That financial institution can be a bank, credit union, mutual fund company, insurance company, or brokerage firm. An IRA is not an investment, but is a tax-deferred account. The actual investment or what it goes into depends upon what's offered by your IRA custodian. If your IRA custodian is a bank or credit union your IRA funds are normally invested in a money market account or certificate of deposit (CD) and you would earn what is the current interest rate. If your IRA custodian is a mutual fund company, your IRA funds are invested in the offerings of that mutual fund company and can be invested in a diversified portfolio of stocks and/or bonds and your earnings would be determined by the performance of the funds in which your IRA is invested. If your IRA custodian is an insurance company, your IRA funds are usually invested in a fixed, indexed, or variable annuity. An annuity is a contract between you and insurance company where the insurance company promises to pay you a certain amount of money on a periodic basis for a certain amount of time, including lifetime. For fixed annuities, your earnings are determined by the rate offered at the of your investment. For indexed annuities, the rate offered depends upon the performance of market indices. For variable annuities, the rate of return is determined by the performance of the subaccounts in which your funds are invested. If your IRA custodian is a brokerage firm, your IRA funds can be invested in any combination of stocks, bonds, mutual funds, and other investments. The rate of return for your IRA invested at a brokerage firm would depend upon the performance of the investments selected.
Question: Don't taxes go away on these accounts at age 59 1/2?
Answer: No. What goes away at age 59 1/2 is the 10% early withdrawal penalty associated with withdrawals from tax-deferred accounts. Ordinary income taxes are still due when money is withdrawn.
Question: What's the maximum I can roll over into an IRA?
Answer: There is no maximum associated with IRA rollovers (money coming from retirement plans or other tax-deferred accounts? There are maximums associated when you are making contributions directly into an IRA. For calendar year 2022 the maximum is $6,000.
Question: Will the 20% be all of the taxes I owe and does it include the 10% early withdrawal penalty if I'm younger than 59 1/2?
Answer: The 10% is in addition to any taxes withheld. Think of the 20% withholding as a "down payment" on your taxes for withdrawing money from your tax-deferred account. The seven (7) tax brackets are the 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If you are under age 59 1/2 and in the 10% tax bracket, then it is likely that the mandatory 20% withholding will cover the 10% tax and 10% early withdrawal penalty. To estimate the total tax, if you're 59 1/2 or younger, essentially add 10% to the seven tax brackets listed above.
Question: Is it better to rollover the retirement plan from my old employer to my new employer?
Answer: Every situation is different, but you are limited in the investment options available in the new company plan by doing so. An IRA rollover may provide broader investment options from which to choose in many cases.
Question: What are the fees associated with an IRA Rollover?
Answer: IRA fees vary depending upon the company chosen to be the custodian of the IRA, but generally range from $0 to $100 per year. This fee only covers the charge for a particular company serving as custodian. There are separate fees that may be associated with the particular investment(s) selected inside of the IRA.
Question: Do I have to roll over my company stock into a rollover IRA?
Answer: In many instances, it is better to NOT roll over company stock into an IRA. That's because there is special tax treatment that can be associated with the company stock portion only of a retirement plan. Instead of paying taxes at the ordinary income tax rate (those 7 rates listed above), company stock outside of an IRA could be subject to long-term capital gains rates that are currently set at a 20% maximum.
Question: This question I have is not covered above. Where can I get help?
Answer: Click here to contact us or call today at 901-312-9166 or 800-754-1218 to learn more about your IRA rollover options. Jones Wealth Management Group does not provide tax advice and this information should not be used as a basis for tax advice. Please consult your tax professional as it pertains to your situation.