Frequently asked questions about IRA's

A.  Roth IRA

  1. What is a Roth IRA?

  2. Am I Eligible for a Roth IRA? 

  3. How Much Can I Contribute? 

  4. Do I Pay Taxes on My Earnings? 

  5. What is a Qualified Distribution? 

  6. Does the 10 Percent IRS Premature Distribution Apply if I Withdraw My Money Before Age 59 ? 

  7. What if I Need Access to My Money Now? 

  8. When Do I Have to Start Taking Distributions From My Roth IRA? 

  9. What Happens in the Event of My Death? 

  10. How Do I Move Funds From a Traditional IRA to a Roth IRA? 

  11. When Is the Contribution Deadline for Funding a Roth IRA?

  12. How Do I Open a Roth IRA? 

B.  Education IRA

  1. What is an Education IRA? 

  2. Am I Eligible to Contribute to an Education IRA? 

  3. How Much Can I Contribute? 

  4. How Does the Law Define a "Child"? 

  5. What if I Want to Save for More Than One Child? 

  6. Do I Pay Taxes on the Earnings? 

  7. What is a Qualified Higher Education Distribution? 

  8. What is a Nonqualified Distribution? 

  9. Can I Move Funds From My Traditional or Roth IRA Into an Education IRA? 

  10. How Do I Open an Education IRA? 

C.  QP-to-IRA Transfers & Rollovers
It is important for you as a Qualified Plan (QP) participant to understand the three methods available -- rollovers, direct rollovers and transfers -- to move funds from one Qualified Plan to another, or to an IRA.
Workers who participate in an employer-sponsored qualified retirement plan, or certain annuity plans, have traditionally had the privilege of being able to move assets distributed from such plans to another plan of their own, to maintain tax-sheltered status after separation from service, termination of their employer plan, or upon retirement.

The means for moving these assets have traditionally been by transactions known as "rollovers," or "transfers." With the passage of Public Law 318 in 1992 came new rules governing the transfer or rollover of funds from qualified plans or certain annuities to IRA plans. These new rules were effective as of January 1, 1993.

These rules define a new method of moving these assets--a direct rollover. But more importantly, they impose a 20% withholding requirement if these funds are paid to you, even if you elect to later roll them over. Being informed of the rules of transfers, rollovers and direct rollovers has never been more important to plan participants.

Following is a description of the process by which you may move your distributed plan assets to another tax-preferred plan (normally an IRA) by rollover or transfer or direct rollover.

  1. If I am Paid Funds From a Retirement Plan, How Will I be Taxed? 

  2. What is a Rollover? 

  3. What is a Direct Rollover? 

  4. What is a Transfer?

  5. Can You Summarize Briefly What the 20 Percent Withholding and Direct Rollover Rules Deal With? 

  6. To What Types of Distributions do the New Rules Apply? 

  7. What Distributions are Eligible to be Rolled Over? 

  8. What Plans Qualify as an Eligible Retirement Plan so That They May Receive a Direct Rollover Contribution From a Qualified Plan? 

  9. If My Distribution Qualifies to be Rolled Over, How do I Elect to Have the QP Distribution Paid Directly to an IRA? 

  10. What Type of Form or Explanation am I Entitled to Receive From My Plan Administrator? 

  11. May I Elect to Directly Roll Over a Portion of my Distribution and Have the Remainder Paid to Me? 

  12. Is it Still Permissible to Transfer Funds From One Qualified Plan to Another Qualified Plan? 

  13. What is the Maximum Amount Which May Be Rolled Over or Directly Rolled Over to an IRA? 

  14. What is the Minimum Amount I Must Roll Over? 

  15. Must I Roll Over the Same Assets Distributed to Me? 

  16. If I Die, Do My Beneficiaries Have any Rollover Rights? 

  17. What is a "Conduit IRA"? What are the Rules Governing Rolling Over a Distribution From an IRA to a Qualified Plan? 

  18. Must Funds be Kept Separate Under a Different Plan Agreement or May They Be Kept Separate Under a Different Time Deposit or Investment Vehicle? 

  19. Can I Transfer or Directly Roll Over Funds From my Current IRA to a Qualified Plan Such as a 401(k) Plan? 

  20. Should I Consult with My Tax Advisor Before Deciding to Roll Over, Transfer or Directly Roll Over a Pension Distribution? 

Roth IRA

  1. What is a Roth IRA?
    The Roth IRA is a nondeductible account that features tax-free withdrawals for certain distribution reasons after a five-year holding period. 
     

  2. Am I Eligible for a Roth IRA?
    Basically, there are two requirements for eligibility to contribute to a Roth IRA: you must have earned income (or your spouse must have earned income) and your modified adjusted gross income (MAGI) cannot exceed certain limits (see table below). 
     

  3. How Much Can I Contribute?
    You may contribute any amount up to 100 percent of your earned income or $2,000, whichever is less, as long as your MAGI is within prescribed limits. These prescribed limits for contribution are:

    Single Filers

    MAGI of 
    $95,000
    or Less
    MAGI of 
    $95,000 to
    $110,000
    MAGI of 
    $110,000
    or More
    Full $2,000
    Contribution
    Partial
    Contribution
    No
    Contribution


    Married, Joint Filers

    MAGI of
    $150,000
    or Less
    MAGI of
    $150,000 -
    $160,000
    MAGI of
    $160,000
    or More
    Full $2,000
    Contribution
    Partial
    Contribution
    No
    Contribution

    It's important to note that $2,000 is the aggregate amount that you can contribute to any Roth and/or traditional IRA in a given year. For example, if you contribute $500 to a traditional IRA, you can only contribute $1,500 to a Roth IRA for that year.

     

  4. Do I Pay Taxes on My Earnings?
    No (provided you take the earnings as part of a qualified distribution). That's the best part of the Roth IRA. Unlike a traditional IRA, you cannot take a tax deduction for any of the contributions that you make to a Roth IRA. However, when you're ready to take a withdrawal, you pay no taxes on any of the earning that your money has generated.
     

  5. What is a Qualified Distribution?
    In order for earnings to be tax free, you must first meet a five-year holding period for your Roth IRA. This period begins with the tax year for which the first contribution is made. After that, any earnings you withdraw for a qualified distribution reason are tax free and IRS penalty free. Qualified distributions include: 

    *
      Distributions made on or after the date on which you attain age 59. 
    *  Distributions made to your beneficiary (or your estate) upon your  death 
    *  Distributions attributable to your being disabled, and 
    *  Qualified first-time home buyer distributions (up to $10,000). 
     

  6. Does the 10 Percent IRS Premature Distribution Apply if I Withdraw My Money Before Age 59?
    The 10 percent IRS penalty does not apply to earnings you withdraw when you take any of the qualified distributions listed above. In addition, the 10 percent penalty is also waived for certain other distribution reasons. But, for these distributions, taxes on any earnings will apply. Distributions that are subject to taxes (on any earnings withdrawn) but no penalty include: 

    *  Substantially equal periodic payments 
    *  Eligible medical expenses in excess of 7.5 percent of your adjusted gross income (AGI)
    *  Medical insurance premiums for eligible unemployed individuals 
    *  Qualified education expenses, and 
    *  Distributions taken within the first five years for any of these reasons: age 59, death, disability, or first-time home purchase. 

    Distributions taken for any reason other than a qualified reason or one of the reasons listed here are subject to both taxes and a 10 percent IRS penalty on any earnings withdrawn.
     

  7. What if I Need Access to My Money Now?
    A helpful feature of the Roth IRA is that, for non-qualified distributions, original contribution amounts are returned first. Contributions (as opposed to earnings) are not subject to taxation or the 10 percent IRS premature-distribution penalty when distributed. In other words, you can always get back your principal tax free and IRS penalty free for any reason.
     

  8. When Do I Have to Start Taking Distributions From My Roth IRA?
    You never have to take distributions from your Roth IRA. That's another benefit of the Roth IRA over traditional IRAs. Assets held in a Roth IRA are not subject to age 70 required minimum distributions.
     

  9. What Happens in the Event of My Death?
    Your named beneficiary(ies) will receive the entire proceeds of your Roth IRA. The manner in which your beneficiary(ies) receives the funds is determined by the election made by your beneficiary(ies) within the guidelines of the law.
     

  10. How Do I Move Funds From a Traditional IRA to a Roth IRA?
    The law only allows people (single or married) with an MAGI of $100,000 or less to convert or roll over their traditional IRA into a Roth IRA. For a rollover or conversion to a Roth IRA, the amount rolled over or converted will be subject to full taxation. However, the funds will not be subject to a 10 percent premature-distribution penalty. Rollovers from a traditional IRA to a Roth IRA are not subject to the "one rollover per 12-months" rule. 
     
    Additionally, the law provides that for conversions/rollovers to Roth IRAs completed in 1998 the taxes will be paid ratably over a four-year period. After 1998, such conversions/rollovers are fully taxable in the year of the distribution.
     

  11. When Is the Contribution Deadline for Funding a Roth IRA?
    Roth IRAs for the taxable year can be opened and funded any time between January 1 and the date your tax return is due for the year, excluding extensions. This is normally April 15 of the following year.
      

  12. How Do I Open a Roth IRA?
    Simply see any of our IRA representatives. We will explain the nature of these accounts in more detail and help you complete the simple forms necessary to establish your Roth IRA. 

Education IRA

  1. What is an Education IRA?
    The Education IRA is a nondeductible account that features tax-free withdrawals for a very specific purpose -- a child's higher education expenses.
     
    At first glance, the Education IRA looks similar to traditional and Roth IRAs. After all, higher education distributions are permitted from these accounts as well. The crucial difference is that while qualified higher education distributions from a traditional or Roth IRA are penalty free, the same distributions from an Education IRA are penalty free and tax free.

    NOTE:
    While the Taxpayer Relief Act of 1997 created this new account, the IRS has not yet defined or clarified much of the law. Consult your tax advisor for further information.
     

  2. Am I Eligible to Contribute to an Education IRA?
    There are two eligibility considerations for an Education IRA. First, the child for whom you are contributing may not have had any contributions made on his or her behalf to a state prepaid tuition program in that year. Second, your modified adjusted gross income (MAGI) cannot exceed certain limits (see table below).
     
    There is no requirement that the contributor have earned income. Nor is there any requirement that the contributor be under age 70.
     

  3. How Much Can I Contribute?
    The total aggregate contribution into one or more Education IRAs on behalf of a child is $500 for a taxable year. As a contributor, your allowable contribution depends on your MAGI. The MAGI limits are:

    Single Filers

    MAGI of
    $95,000
    or Less
    MAGI of
    $95,000 to
    $110,000
    MAGI of
    $110,000
    or More
    Full $500
    Contribution
    Partial
    Contribution
    No
    Contribution

    Married, Joint Filers

    MAGI of
    $150,000
    or Less
    MAGI of
    $150,000 -
    $160,000
    MAGI of
    $160,000
    or More
    Full $500
    Contribution
    Partial
    Contribution
    No
    Contribution


    Your contributions to an Education IRA, however, are not aggregated with your traditional or Roth IRA contributions. In other words, if you establish an Education IRA for a child, you can contribute a total of $2,500 -- $2,000 to your Roth and/or traditional IRA and $500 to an Education IRA for the child.

     

  4. How Does the Law Define a "Child"?
    A child is defined as a person who is under the age of 18. Contributions may be made on behalf of a child until the day before his or her 18th birthday. Contributions on behalf of an individual age 18 or older are not permitted.
     

  5. What if I Want to Save for More Than One Child?
    The law appears to allow contributors to deposit their maximum allowable contribution into Education IRAs for as many children as desired.
     

  6. Do I Pay Taxes on the Earnings?
    No and neither does the child (provided the money is used for qualified higher education expenses). That's the best part of the Education IRA. Unlike a traditional IRA, you cannot take a tax deduction for any of the contributions that you make to an Education IRA. However, when the beneficiary is ready to take his or her withdrawal for school, there are no taxes due on any of the interest that your money has earned.
     

  7. What is a Qualified Higher Education Distribution?
    The term "qualified higher education expense" means tuition, fees, books, supplies, and equipment required for the enrollment or attendance at an eligible higher education institution. Basically, an eligible higher education institution is an area vocational school or university. 
     
    Distributions must be made during the year in which the education expense occurred. If distributions exceed the educational expenses, the additional amount withdrawn is a nonqualified distribution.
     

  8. What is a Nonqualified Distribution?
    A nonqualified distribution is any distribution other than a higher education expense distribution.
     
    When a nonqualified distribution is taken, a ratio of contributions and earnings is withdrawn. The earnings portion is then subject to taxes and a 10 percent penalty. Distributions made on account of death, disability, or scholarship are not subject to the 10 percent penalty. However, the earnings portion of such distributions is taxable.
     

  9. Can I Move Funds From My Traditional or Roth IRA Into an Education IRA?
    Unfortunately, no. You can, however, roll funds over from one Education IRA into a second Education IRA established for the same child.
     
    Also, a twist with the new Education IRA is the ability to roll an Education IRA into an Education IRA for a new designated beneficiary who is a member of the same family (as defined by law). That way, if a child decides not to pursue his or her education, the account can be transferred to a relative who does.
     

  10. How Do I Open an Education IRA?
    Simply see any of our IRA representatives. We will explain the nature of these accounts in more detail and help you complete the simple forms necessary to establish an Education IRA for a child. 

QP-to-IRA Transfers & Rollovers

  1. If I am Paid Funds From a Retirement Plan, How Will I be Taxed?
    The general rule is that the funds paid to you will be included in income and taxed at ordinary income tax rates. When the plan administrator submits Form 1099-R, he or she will inform the IRS of the gross distribution amount, taxable amount, amount of any withholding, and the reason code of the distribution. In some situations, lump-sum distributions from qualified plans will qualify for special 5 or 10-year averaging, or capital gain treatment.
     

  2. What is a Rollover?
    A rollover is an exception to the general rule that distributions are taxed. Even though you were paid funds, you will not have to include the amount received as gross income if the rules are met (see question 5 below). These "rolled over" funds will not be taxed until a future taxable distribution occurs. Note that the movement of funds in a rollover is as follows: the original retirement plan pays the funds to the plan participant, who then redeposits these funds into another eligible plan, normally an IRA. This rollover deposit will be reported by the new IRA custodian/trustee on IRS Form 5498. The IRS will "match or compare" your rollover amount to the amount shown on Form 1099-R to determine if you have paid the proper taxes.
     
    A recipient is only allowed to exclude a distribution from his or her gross income if the rollover is made within 60 days following the day of receipt. By doing so you will avoid current taxes which are the normal result when a distribution is taken. You will also avoid paying the 10% excise tax which would apply if you are not yet age 59 (unless you are using the pre-age 59 special exception).
     
    These recontributed funds plus their earnings will continue to compound or grow tax deferred until distribution commences by choice after age 59, or as required after age 70.
     

  3. What is a Direct Rollover?
    A "direct rollover" is a distribution from a pension plan that would be eligible to be rolled over, but is instead paid directly to another retirement plan. The transaction must be executed for the benefit of the person entitled to receive the distribution from the pension plan.
     
    A direct rollover may be accomplished by any reasonable means of direct payment to an eligible retirement plan. If payment is made by check, the check must be negotiable only by the trustee of the eligible retirement plan. For example, ABC Bank as trustee of the IRA of Maria Evert or the Trustee of XYZ Corporation Profit Sharing Plan FBO Jim Davis. Payment should not be made by wire transfer. It is permissible that the plan furnish you with a check if you are instructed to deliver the check to the trustee and the check is made payable as indicated above solely to the trustee.
     

  4. What is a Transfer?
    The effect of a transfer is the same as that of a rollover. Funds are moved from one retirement plan to another without any immediate tax consequences. However, a transfer is distinguished from a rollover because in a transfer the funds move directly from plan/trustee to the successor plan/trustee. You are not actually paid the funds. A transfer must occur between identical types of plans (e.g. IRA to IRA, qualified plan to qualified plan).
     

  5. Can You Summarize Briefly What the 20 Percent Withholding and Direct Rollover Rules Deal With?
    There are essentially three rules. They define when someone is eligible to roll over a distribution from a qualified plan and certain other plans to an IRA.
     
    The rules mandate that the plan administrator must withhold 20% of the amount of any distribution which is eligible to be rolled over. This is the IRS' guarantee that it will get its tax share if the funds are not re-contributed.
     
    Also the rules provide that if the funds are directly rolled over to certain types of plans, there will be no 20% withholding. You will most likely wish to take advantage of these new direct rollover rules. 
     

  6. To What Types of Distributions do the New Rules Apply?
    The new rules, in general, apply to distributions from a qualified plan (defined in IRS Code section 401[a]) and annuities (described in section 403[a] and 403[b] of the IRS Code). The new rules do not apply to distributions from IRAs.
     

  7. What Distributions are Eligible to be Rolled Over?
    Generally the distribution of any portion of your qualified plan or a tax-sheltered annuity or account balance will be eligible to be rolled over. Three exceptions are discussed in the following paragraph.
     
    Once you reach age 70, you must start taking distributions from your account each year. These are not eligible to be rolled over or transferred. Also, you are not eligible to roll over annuities paid over life, or life expectancy (single or joint) or any distribution which is one of a series of substantially equal periodic payments (i.e. installments) for a period spanning ten years or more. Also, a distribution which would not be taxable is not eligible to be rolled over.
     

  8. What Plans Qualify as an Eligible Retirement Plan so That They May Receive a Direct Rollover Contribution From a Qualified Plan?
    There are four such plans: (1) an IRA, (2) an IRA annuity, (3) a 401(a) qualified plan, and (4) a 403(a) annuity plan. Rollovers between qualified plans were permissible under the old rules, but only if the distribution was a qualified total distribution. A partial distribution was only eligible to be rolled over to an IRA. The new law will permit partial QP distributions to be rolled to another QP plan if that plan permits such contributions.
     

  9. If My Distribution Qualifies to be Rolled Over, How do I Elect to Have the QP Distribution Paid Directly to an IRA?
    Your plan administrator will furnish you with a form that will authorize the direct rollover to your IRA. If your plan administrator does not furnish you with this form, we can furnish you one, which you will give your plan administrator.
     

  10. What Type of Form or Explanation am I Entitled to Receive From My Plan Administrator?
    A plan administrator shall, within a reasonable period of time before making a distribution that qualifies to be rolled over, provide a written explanation to the recipient (you the participant, your beneficiary or an alternate payee) -- 
    a)  of the provisions in the plan document under which the recipient may have the distribution directly transferred to another eligible plan. 
    b)  of the provision in the plan document which requires the withholding of tax on the distribution if it is paid to you, the recipient (not directly transferred). 
    c)  of the provisions of the federal tax law under which the distribution will not be subject to tax if rolled over to another eligible plan within 60 days after the date on which the recipient received the distribution. 
    d)  if applicable, an explanation of 5-year averaging, 10-year averaging, and capital gain tax treatment. 
     
    After being furnished this information you can decide whether to be paid these funds (and to have automatic withholding of 20%) or to directly roll over the payment to another eligible plan.
     
    Special rule. If your distributions during the year are reasonably expected to total less than $200, then the plan administrator need not offer you the right to directly roll over the funds.
     

  11. May I Elect to Directly Roll Over a Portion of my Distribution and Have the Remainder Paid to Me?
    Yes. The plan administrator must permit you to do this with one exception. The plan administrator can require that the amount to be directly rolled over be at least $500. The plan administrator is also permitted to limit you to a single direct rollover for each eligible rollover distribution.
     

  12. Is it Still Permissible to Transfer Funds From One Qualified Plan to Another Qualified Plan?
    Yes. Transfers between qualified plans are still permissible if both plan documents authorize the transfers. (The law still does not require a QP plan to be written to accept a transfer from another QP plan.)
     

  13. What is the Maximum Amount Which May Be Rolled Over or Directly Rolled Over to an IRA?
    The maximum amount is that amount which would be includable in income, if not for the rollover. This means that nondeductible employee contributions are not eligible to be rolled over. Your plan administrator should inform you of what portion, if any, of your distribution is not eligible to be rolled over. (Any amount correctly listed in Box 5 of Form 1099-R is not eligible to be rolled over.)
     

  14. What is the Minimum Amount I Must Roll Over?
    You do not have to roll over the entire distribution or any portion of it. You can roll over as much or as little as you want. Any portion you do not roll over is taxable immediately and may be subject to the IRS' 10% excise tax for distributions prior to age 59 unless a special exception applies. A rollover contribution, of course, is not subject to the $2,000 annual limit on IRA contributions.
     

  15. Must I Roll Over the Same Assets Distributed to Me?
    Any portion paid in the form of an eligible rollover distribution may be rolled over; but if the distribution includes property other than cash, then that property must be rolled over. This means you cannot substitute other property which you own.
     
    If the property is sold, the proceeds may be rolled over since the proceeds are treated as if they had been received in the distribution.
     

  16. If I Die, Do My Beneficiaries Have any Rollover Rights?
    Only a spouse beneficiary of a qualified plan has the right to roll over a distribution to an IRA. A payment to a surviving spouse is eligible to be rolled over to an IRA or IRA annuity (but not another qualified plan) unless it is a required minimum distribution or one of a series of "substantially equal periodic payments." A non spouse beneficiary does not have the right to roll over the funds and will, under other tax rules, be required to withdraw the funds within certain time limits.
     

  17. What is a "Conduit IRA"? What are the Rules Governing Rolling Over a Distribution From an IRA to a Qualified Plan?
    The general rule is that funds in an IRA are not eligible to be rolled over to a qualified plan. There is one exception. If the funds in the IRA originated in a qualified plan, then they may be paid from the IRA to you, and you may roll them over into another qualified plan, if the plan is written to accept such rollover contributions. Not all plans are so written.
     
    Thus, if you receive a distribution from a qualified plan and roll some or all of the distribution to an IRA, then you will be eligible to roll over these "conduit IRA" funds to another qualified plan, as long as you do not mix or combine any funds from other sources with the original funds, and related earnings.
     

  18. Must Funds be Kept Separate Under a Different Plan Agreement or May They Be Kept Separate Under a Different Time Deposit or Investment Vehicle?
    Yes. The most conservative approach is to keep the funds separate under a different IRA plan agreement, and not rely on just separate time deposits, or other investment vehicles.
     

  19. Can I Transfer or Directly Roll Over Funds From my Current IRA to a Qualified Plan Such as a 401(k) Plan?
    No. Transfers can only occur when the money movement is between the identical types of plans (i.e. QP to QP or IRA to IRA). A direct rollover cannot occur from an IRA.
     

  20. Should I Consult with My Tax Advisor Before Deciding to Roll Over, Transfer or Directly Roll Over a Pension Distribution?
    Yes. Because of the complexity of the tax rules, you are strongly advised to consult with your tax advisor to determine the most favorable course of action for you with respect to your distribution. What is right for you may not be right for another person or vice versa. 

 

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