IRAs have been around for more than 40 years, and many people have one or more. But, I doubt that many truly understand them. After 39 years in Financial Services, I can honestly say that. That includes some bankers, financial advisors and, perhaps, even CPAs. (I kid you not.)
Many Americans feel comfortable that, since they have “an IRA”, their Retirement is secure. But, the real question is: how much is in their IRA(s), in addition to other Retirement or Personal Assets? Do they know what their Social Security payments, or other income (Pension or rental income) will be each month. And, the offset is: what monthly payments will they be paying for a home mortgage or rent, car loans, credit card debt, etc. And, don’t forget property tax, and homeowner’s, health and auto insurance.
If you consider the number of definitions that I have listed (below), IRAs are truly not “one size fits all” instruments. Then, you have to differentiate between whether withdrawals will be taxable or tax-free. And, what about when your various IRAs and other assets are passed-on to a spouse or beneficiaries, when you pass away? You might be able to make adjustments along the way. So, plan ahead.
I will cover IRA Management–Post-Retirement over several Blog Posts. For this purpose, I will direct my comments to someone who is retired, and has beneficiaries to receive unneeded financial or other assets. Additionally, I am assuming that all other retirement assets (i.e. company-sponsored plans). have been rolled-over into their IRAs.
When you first Retire, it is important to get a handle on assets and liabilities, anticipated income and outgo, and any other obligations that you might have. Realize that assets in Traditional IRAs and most other Retirement Plans must be withdrawn at certain times, if not sooner. So, start to realize whether there are enough assets, or a shortfall.
In the next IRA Management Post, I will discuss some management strategies to achieve the highest after-tax value of your money–both now and in the next generation. So, keep the Definitions (below) handy.
NOTE: Please address all specific questions to your own Tax Advisor.
Qualified Plans: 401(k)s; 403(b)s; 457s (Deferred Comp.); SIMPLE IRAs; etc. are various company-sponsored retirement plans. They generally include pre-tax contributions; however, some might provide for post-tax contributions.
Traditional IRA: An Individual Retirement Account, which is funded by pre-tax Dollars. Withdrawals are generally taxable.
ROTH IRA: An individual retirement plan, which is funded with after-tax Dollars. Withdrawals are tax-free. Other rules might apply.
RMD: (Required Minimum Distribution), which requires the gradual withdrawal of pre-tax plan assets, based on actuarial tables, and begins when someone reaches 70 1/2.
Spousal IRA: an IRA transferred from a deceased spouse to the surviving souse. Alternatively, the IRA assets can be merely transferred into the surviving spouse’s own personal IRA. Generally, Traditional assets are transferred to the spouse’s Traditional and, likewise, ROTH to spouse’s ROTH IRA.
Beneficiary IRA: Non-spouse beneficiaries must establish a separate IRA from their own, labeled with “beneficiary” in the title. Traditional IRA assets must be withdrawn in a lump sum, over five years or a “Stretch” (based on actuarial tables over the beneficiary’s lifetime).
In-Service Withdrawal: some years ago, the Government provided for people who are 59 1/2, or older, to transfer funds (in part or in total) from Qualified Plans to IRAs. This transfer, however, is subject to the provisions of the “Plan Document”. If so, the employee may continue to make on-going contributions into the Company Plan, and receive matching contributions from the employer.
Roll-over: the transfer of money from a qualified plan directly to the participant who, in turn, may deposit the proceeds into either a Traditional or ROTH IRA. The re-investment must be accomplished within 60 day to be effective.
Trustee-to-trustee transfer: the transfer of assets from a qualified plan directly into either a Traditional or ROTH IRA. Generally, it would be pre-tax to Traditional, or post-tax to ROTH.This transfer by-passes the participant.
IRA “Re-characterization”: Transferring assets from a tax-deferred Traditional to a ROTH IRA would require the payment of Taxes. Going from a ROTH to a Traditional might provide a Tax-Deduction.
IRA 72t Distribution: Generally, when someone under 59 1/2 years of age withdraws funds from a Traditional IRA, both Income Tax and a 10 percent penalty would be paid. Withdrawals taken over time–based on actuarial tables–can avoid that 10% penalty. That’s called a “Reg. 72t”.