IRA Planning

You Have One Or More IRAs, Now What?

Retirement IRA investing isn't necessarily easy to understand, especially with the advent of new IRA rules. But it's important to have a basic understanding of IRA rules before you take money out of one IRA to put in another IRA or move your IRA money from one institution to another institution.

The first thing you should know is that retirement accounts are generally taxed at regular income tax rates, not capital gains rates when withdrawals are made. This means any money taken out will be taxed as ordinary income unless it's withdrawn after age 59½ or qualifies for an exception.

If the IRA owner dies, their beneficiaries do not have to pay taxes on withdrawals provided they are made five years after death. If there are no designated beneficiaries withdrawal must be made by Dec. 31 of the fifth year following the IRA owner's death in order for it to be exempt from taxation.

When IRA trustees make distributions they do not withhold taxes and may only pay the proportion attributable to income earned on IRA assets (interest and dividends). The remainder must be paid by the IRA owner when funds are withdrawn.

Another IRA issue that confuses IRA owners is when they can take distributions or withdraw IRA money without penalty, such as when a person reaches age 59½. There is no single rule that applies in every case; rather, whether you will owe an early distribution penalty, and how big a penalty you might have to pay, depends upon how your IRA was funded, e.g., through rollovers from other IRA accounts, employer-sponsored pension plans or purchases of IRA investments.

One important IRA rule to know about is the spousal rollover IRA. A spousal IRA IRA allows non-working spouses, e.g., stay at home parents, to benefit from IRA tax benefits when IRA IRA -owned accounts are held in the IRA IRA account-holder's name.

If your IRA IRA is inherited, you have to take required minimum distributions (RMDs) from the IRA IRA according to an IRS rule called “stretch IRA IRA” that allows beneficiaries to spread out their withdrawals over their life expectancies.

3 things you should know about IRA accounts

Maybe you started saving for retirement years ago or maybe you opened IRA accounts more recently. Either way, once retirement is in view it's time to start thinking about IRA planning. IRA account holders who take the time to prepare can make IRA distributions easier on themselves later. As taxable income rises with IRA withdrawals every year, there are both income tax and estate tax implications that will affect IRA heirs.

Succession planning is an important part of IRA planning - how your IRA assets pass to loved ones after you're gone can be crucial to their financial future. Succession planners should consider required minimum distribution (RMD) rules when they plan an IRA succession strategy, because if they fail to follow IRA RMD rules IRA heirs will face hefty IRA penalties. IRA owners can, however, choose beneficiaries to inherit IRA assets after their death. IRA owners also have the option of leaving their IRA assets directly to a beneficiary who is not named as an IRA heir.

What may be surprising to some IRA account holders is that they are required by law to name beneficiaries for their IRA accounts (and update those designations on time), and even if they don't know the identity of potential IRA heirs, an estate plan should be in place that spells out what happens to IRAs at death.