IRA Questions & 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: The umbrellas below represent the different types accounts that are designed for retirement savings. Think of each one as a different colored umbrella. Instead of this "umbrella" protecting you from rain, these are designed to protect your from taxes by deferring taxes until money is withdrawn (taken from under the umbrella).

Ordinarily any interest 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dividend is earned while it is in one of these tax-deferred accounts (under the umbrella), it isn't taxed until it is withdrawn from the account.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: 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 Ordinary income taxes are still due when money is withdrawn.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 2016, the maximum is $5,500.

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 six (7) tax brackets are the 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. 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 six 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 $50 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: Please click here to send a direct inquiry to have questions answered as it relates to your individual situation or call today at 901-312-9166 or 800-754-1218.

This information should not be used for a basis for tax advice. You should seek the guidance and advice of your own tax counsel.