Watch Out for IRA Rules

by Stephen Kass on July 17, 2012

If you’ve been faithfully putting money into your Individual Retirement Account and other retirement plans, congratulate yourself. However, if you’re currently
contemplating retirement, you’ll learn that saving diligently is only half of the equation.
One of the first decisions you need to make is whether to tinker with your present IRA. In addition to the traditional IRA, you may be eligible to establish a Roth IRA or
convert your traditional IRA to a Roth. If you select a Roth IRA, you and your heirs generally won’t pay income taxes on the distributions which accumulate tax-free as long
as certain guidelines are followed.
However, unlike the traditional IRA, annual contributions to a Roth aren’t deductible. You’ll also probably owe taxes when you make the conversion. Not
everyone will qualify for the conversion – a taxpayer’s adjusted gross income must not exceed $100,000.

Here are some other tips:

  • Choose the correct distribution method. By age 70 ½, many people must begin withdrawing annually from their traditional IRAs or face tax penalties. Retirees can take their minimum payments using one of two methods that will calculate life expectancy. Once they choose, however, they can’t switch to the other formula even if the tax consequences are disastrous. For a Roth IRA, there are no mandatory distributions during your lifetime.
  • Check beneficiaries. Make sure the beneficiaries listed on your IRAs are correct. If the paperwork isn’t correct, however, your desires won’t be honored later even if you’ve named the correct beneficiaries in a will because beneficiary designations override what’s in the will.
  • Pay attention to the tricky rollover regulations. If you’re planning to roll over your retirement distribution from your employer, you’ll want to avoid a mandatory 20% federal tax withholding. To avoid paying the tax, you should instruct your employer to send your retirement nest egg directly to a rollover IRA account of your choosing.

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