Frequently Asked Questions About Retirement Planning Individual Solutions

Q: If I leave my current job, can't I just reinvest the check the company sends me?

A: You can reinvest into an IRA. But, if your company plan makes the check payable to you, 20% of your eligible retirement plan distribution will be withheld for federal income taxes. The only way to avoid this withholding is to have your employer make your distribution check payable to the financial institution you've chosen for your new rollover plan. Either you, or the employer, should then send this check directly to the financial institution.

Q: How are funds moved from a Qualified Plan to an IRA?

A: When a participant receives assets due to death, disability, normal retirement or separation of service, funds can be moved from a qualified plan to an IRA only by a rollover or a direct rollover. The moving of any funds from a qualified plan to an IRA is reported to the IRS. Assets that may not be rolled over include: any part of a substantially equal periodic payment, required minimum distribution, death benefit exclusion, and any employee nondeductible contributions.

Q: What if I need my retirement money to pay expenses?

A: Your best bet may still be to roll your retirement plan money into an IRA now. If you do need money to pay expenses later, you can always withdraw just what you need - when you need it. Remember, however, that the withdrawal from the traditional IRA is subject to ordinary income tax and prior to age 59 1/2 is subject to a 10% withdrawal penalty. There may be some situations which would cause the distribution to be eligible for special tax treatment.

Q: What is the difference between an IRA to IRA rollover and an IRA to IRA transfer?

A: A rollover occurs when the funds from your IRA are given directly to you, with a check made payable to you. You then have 60 days to deposit all or a portion of those funds into another IRA in order to avoid immediate taxation. The IRS allows one rollover per 12-month period. A transfer occurs when funds from your IRA are moved directly from one institution to another without you having control of the assets. The receiving institution initiates the request for the transfer of the assets at your request; the releasing institution makes the check payable to the receiving institution for your benefit. Because you do not take control of the assets, no tax reporting is made to the IRS. An unlimited number of transfers from one IRA to another are allowed.

Q: Can I consolidate my IRAs?

A: You can consolidate IRAs by rollover or transfer of any eligible distribution into another IRA. You can also direct rollover to an IRA from a qualified plan, or you may rollover the distribution yourself. However, assets from a qualified plan cannot be rolled temporarily and mixed with other IRA funds if you are planning on eventually moving the qualified plan assets to another qualified plan. However, a separate conduit IRA may be established.

Q: Who can contribute to a Traditional IRA?

A: Anyone under age 70½ who has earned income can make a regular IRA contribution. If both you and your spouse have compensation, each spouse may establish an IRA and contribute based on your separate incomes. A Spousal IRA can also be opened for a non-wage earning spouse. Rent and investment income do not qualify as earned income.

Q: What is the maximum contribution?

A: Contributions may be any amount up to $4,000 or 100% annual compensation, whichever is less. The combined annual contribution for an IRA and a Spousal IRA is $8,000 for tax years beginning on or after January 1, 2005.

Q: What happens if I contribute more than the maximum amount?

A: There is an IRS imposed penalty of 6% on the excess contribution if the funds are not withdrawn prior to the due date of your tax return. This penalty is assessed every year until the funds are withdrawn. A 10% IRS premature distribution penalty may also be applied on the interest income earned on the excess contribution. The penalties are paid upon filing a tax return.

Q: Until what date can a contribution be made to an IRA?

A: An IRA may be opened or IRA contributions can be made for a particular tax year at any time until the tax-filing deadline (usually April 15th of the following year). No extensions are permitted. Remember an IRA lets your money grow and accumulate tax deferred. Therefore, the earlier you make your contribution, the faster your retirement savings will grow. If possible, start contributing to your IRA in January.

Q: Are Traditional IRA contributions tax deductible?

A: IRA deductions are based on whether you are an active participant in an employer-maintained retirement plan and if so, your adjusted gross income and your income tax filing status. Depending on your circumstances, you may claim a maximum deduction, a partial deduction, or no deduction. Deductions begin to decrease when income rises above a certain amount and is eliminated all together when it reaches a higher amount. As a result of New IRA Rules, more individuals will become eligible for tax deductible contributions. Our interactive IRA Deductibility Guide will help you determine the tax deductibility of your contribution.

Q: Are my IRA earnings taxable?

A: All earnings on traditional IRA contributions remain tax deferred until withdrawals are made from the account.

Q: What is a distribution?

A: An IRA distribution is a withdrawal from an IRA.

Q: When can I take distributions from a traditional IRA?

A: Withdrawals can be made from a traditional IRA, without the 10% IRS premature distribution penalty, any time after you reach the age of 59½, become disabled or die. Effective January 1, 1997, the 10% penalty will not apply for IRA distributions taken for medical expenses exceeding 7.5% of adjusted gross income or for the purchase of health insurance if you are receiving unemployment compensation for more than twelve weeks. These distributions will be included in taxable income. When you reach 70½, you must take a minimum required distribution or severe penalties will be imposed. New legislation allows other exceptions to the 10% penalty (but not income tax) on early IRA withdrawals used to pay higher-education expenses and for first time homebuyers. This new legislation is for distributions beginning January 1, 1998. For more information on the current legislation on IRAs, visit our New IRA Rules section.

Q: Are there any other ways I can start taking money from my IRA before age 59 ½ without a penalty.

A: Yes. You can also make penalty free withdrawals (before age 59 ½) in substantially equal installments, at least annually, based on your life expectancy or the joint life expectancy of you and your beneficiary. This withdrawal plan must continue for five years or until you reach 59 ½, whichever is longer. Thereafter you can take the money as needed.

Q: When must distributions begin?

A: You must receive the entire balance in your traditional IRA or start taking required minimum distributions from your IRA by April 1 of the year following the year in which you reach the age of 70½ to avoid being required to double up distributions so that the minimum distribution requirements are met. Failure to meet the minimum distribution requirement will result in a 50% IRS penalty on the amount not distributed.

Q: What happens to my IRA when I die?

A: If periodic distributions that satisfy the minimum distribution requirement have started and you die, any money remaining in your IRA must be distributed to the designated beneficiary at least as rapidly as under the method being used by you prior to your death. If you die before distributions that satisfy the minimum distribution requirement have begun, the entire balance must be distributed to the designated beneficiary by either: 1. December 31 of the fifth year following the year of your death. 2. Over the life of the designated beneficiary or over a period not extending beyond the life expectancy of the designated beneficiary. 3. A spousal beneficiary can treat the IRA as his/her own and rollover the funds.