How to open an IRA

Opening an Individual Retirement Account is a retirement planning decision. Depending on whether or not your IRA is a traditional, Roth or Simple IRA, opening an IRA can be subject to specific differences in regulation. To open a traditional or Roth IRA for a specific year usually requires 1) an application, 2) IRA disclosure terms, 3) an initial deposit, and 4) funding before the annual April, 15th tax deadline.

Where to find an IRA

IRAs are opened through IRS sanctioned financial institutions or 'custodians' that hold and maintain the account. Depending on the type of IRA, establishing the account may be a direct procedure between you and a financial institution or insurance company or via a third party such as an employer or financial planner. Financial Institutions are often eager to help with setting up an IRA. This can lead to considerable diversity in the products, services and costs associated with owning an IRA.

When choosing to open an IRA, looking for the option with the most financial potential helps optimize your retirement planning. Many financial institutions offer IRAs, however fees, investment products and maintenance can differ significantly between account custodians. For example, an insurance company IRA may have different reporting procedures and fees than a self-directed IRA through a brokerage firm.

How to qualify for an IRA

To qualify for a traditional IRA, which is not the same as a Roth IRA or Simple IRA, you must also meet the IRS requirements that include 1) having earned taxable income for all years that the IRA is invested in, and 2) being under the 70.5 year age limit for traditional IRAs. IRAs can be funded with any amount of value up to the annual contribution limit and within the minimum deposit parameters allowed by the IRA custodian.

In the case of employer funded IRAs such as a Simplified Employee Pension IRA your employer will be required to submit additional documentation such as an IRS Form 5305-Sep to the IRS. Individual Retirement Accounts can be rolled over, but must meet IRS authorized criterion. To find out if your IRA rollover is allowable contacting the IRS directly is a good way to find out. Sometimes an IRA may receive direct deposits of assets such as mutual fund shares held within another account.

The different types of IRAs

The differences between each type of IRA are relevant when determining how to open an IRA. For example, a Roth IRA is contributed to with taxable income and has no opening age limit whereas money placed into a traditional IRA is deductible from taxable income and can only be done so up to age 70.5. For an employer IRA such as a Simple IRA, funds are placed into the IRA before being paid out to an employee. Other variations include when withdrawals are required for traditional IRAs and annual contribution matching in the case of Simple IRAs.

Roth IRAs, unlike Traditional IRAs have income restrictions and cannot be funded if your Adjusted Gross Income is beyond the contribution cap. Married couples are allowed to have individual IRAs making the maximum contribution double per married household provided income limitations are met. Allowable annual payments to IRAs vary according to income, and tax filing status.

Best Tax Free Investment Options

Reducing taxes through 'tax free investments' may be a good idea when one wants to increase financial leverage of one's income and/or lower taxable income for a given year via a lower tax bracket ex 15% instead of 25%. Moreover, the income that would have been taxed that is invested, can also increase either free of tax or tax deferred through the tax free investments. A few of the investments commonly used as a hedge against taxes are described below.

• Tax Free Mutual Funds

Money invested in tax free mutual funds is not taxed because the mutual funds themselves invest in tax free investment vehicles. Depending on which type of investments the mutual funds the income earned in this type of investment instrument is not taxable as the federal level and sometimes the state and local levels.

• Individual Retirement Accounts (IRA's)

There are several types of IRA's including spousal, individual, and the Roth IRA. Some of these are tax deductible while others are tax free investments. Either way, investment in retirement accounts is a way to avoid taxes either in the present or future.

• Municipal Bonds

Municipal bonds are bonds issues by States and local governments. Income earned from these investments is often free of Federal tax but they may also have a lower interest yield than other forms of investment.

• Treasury Bonds

The Federal government also issues bonds, at least two of which can earn tax deferred income. The series I and E/EE bonds are not taxed until redemption making them a possible investment option for those seeking to lower short term taxable income on investments.

• Life Insurance Policies

Money invested in life insurance policies accumulates and increases in value without tax. Examples of such policies include universal and whole life policies through which an account value is added to over and above the monthly premiums paid on the policy. In certain instances the distribution of life insurance after the policy holder's death may be tax free and should the holder survive the maturity of the policy, the proceeds are then subject to tax i.e. tax deferred.

• Real estate

While personal residences are subject to property tax regulations, capital gains on the sale of homes after 2 years of residence are tax free up to a certain dollar amount. If the home value is above 250K, capital gains on it are taxable if there is only one owner. This tax cap amount doubles for homes with more than one owner/resident.

• Education

While education is not an investment that pays solid returns, the investment made into and education is tax deductible on the Internal Revenue Service form 1040 as of the date of this article. The tax deduction may be enough to lower one's taxable income into a lower tax bracket.

There are many ways to invest and avoid paying taxes on those investments. In many of the cases the tax benefit is tied to a provision the money will not be used for an extended period of time or it is only taxed upon withdrawal. Whatever the investment one makes, the benefits can add up either as tax deferred income growth and/or increased financial leverage via a higher tax return or money saved through a lower taxable income.

Taxes on Inherited Roth IRAs

Taxes on Roth Individual Retirement Accounts (IRA's) can be minimized and/or avoided if certain tax rules are heeded with financial caution and prudence. This article will discuss the taxation of inherited Roth IRA's, and some of the scenarios in which Roth IRA's might be taxed after inheritance. Roth IRA's are a retirement savings instrument that might be best considered as part of an overall retirement plan so as to 1) maintain federal insurance of retirement funds 2) minimize taxation during life and after life in the case of inherited Roth IRA's and 3) in the diversification of assets for purposes of risk management.

Taxes on Inherited Roth IRAs

When faced with inheritance, the beneficiaries may be exposed to three to four types of taxes, specifically, estate tax, federal and state income tax and possibly property tax on inherited property. Estate tax determines how much of the deceased's income will be taxed before distribution, then federal income tax follows, with state income tax after that. For example, if estate tax charges 48% of the estate's value, the taxable income from the estate is the value after estate tax is deducted. 

In some cases, estate and income tax combined can end up costing a beneficiary near half of the inheritance. In the case of Roth IRA's, the insured amount is only $250,000 for a single Roth IRA, so it might be imprudent to have a Roth with a value above this amount. If however, the value of the Roth IRA is higher than this amount, the following hypothetical example illustrates how it might be taxed with close to maximum estate tax rates.

1) Roth IRA value $5 million (subject to estate tax for amount of $3.5 million in 2009) 2) Tax equals $555,800 + 45%=$555,800 3) $555,800+ 45% x ($944,200)=$555,800+$444,890=$980,690 4) $3.5Million -$980,690=$2,519,310

How to minimize or avoid estate tax on Roth IRAs

To avoid the estate tax on inherited Roth IRA's the deceased can do a number of things prior to dying, as can the beneficiaries of the deceased. First, if the Roth IRA is included in an estate valued under the taxable inheritance minimum, estate tax may not be charged on the Roth IRA's value. Second, the Roth IRA can be part of an AB trust in which ownership of the trust is not assumed by the beneficiaries at the time of death. Other options include better tax planning several years prior to dying so that asset growth is less likely to be subject to high taxes.

• Place the Roth IRA in an AB trust before dying
• Ensure the value of the estate is below the minimum taxable amount
• Reallocate Roth funds into non-taxable instrument prior to death
• Transfer ownership of the Roth IRA to a foreign owned Trust company

Summary

Roth IRA's are useful financial instruments for avoiding income tax but not estate tax. (investmentguide.com) Thus, if an estate is worth over the taxable benchmark set by the government for that year, for example $3 million, then that value is taxed if it includes a Roth IRA. For this reason it can be important to know which assets and financial instruments are not included in the estate value calculation.

Moreover, being aware of what methods exist for lowering potential tax on inherited Roth IRA's can also be important. For example, in some instances, trusts such as AB trusts are not taxable following the death of the primary trustee. It may be unlikely that a Roth IRA would be subject to estate tax regardless of their ability to avoid this tax because Roth IRA's are only insured up to $250, 000.00. For this reason, controlling the size of the Roth IRA and hedging against taxes through tax protected investment vehicles such as insurance policies or non-taxable bonds may be a good idea.

Sources:

1. http://www.irs.gov/pub/irs-pdf/p590.pdf
2. http://tinyurl.com/64rgbz2
3. http://fsc.fsonline.com/fsj/archive/2004est.html
4. http://rothiraexplained.com/fdic-insurance-coverage-for-iras.html
5. http://www.schwab.com/public/file?cmsid=P-1625576&cv1
6. http://tinyurl.com/6d4qsw7 (Expired reference link)

How to rollover a 403(b) into an IRA

A 403(b) is an employer pension plan similar to an Individual retirement account. In some cases, cessation of employment or changes in retirement planning may require one to shift the funds and/or assets that have accumulated within a 403(b) into an IRA.

There are specific ways to rollover a 403(b) into an IRA without incurring tax penalties and that can therefore save a taxpayer from making unneeded expenditures as a result of the rollover. This article will discuss the methods by which a 403(b) can be rolled over into an IRA without incurring tax penalties in addition to discussing potential advantages, disadvantages and options surrounding the rollover decision/process.

 Assess qualifying distributions and retirement strategies

Not all funds within a 403(b) may qualify for rollover into an individual retirement account. Specifically, annuity distributions, minimum distributions and hardship distributions cannot be rolled over. (www.money-zine.com) Moreover, becoming familiar with what can and can't be rolled over is important.

It may also be worthwhile to considering the possibility of retaining a 403(b), rolling over a 403(b) into another 403(b) with different financial options, a 401(k) or Roth IRA. For example, a 403(b) may have a matching plan and maximum contribution limits that far outweigh the benefits of rolling over into an IRA. Moreover, it may be advantageous from a retirement planning perspective to utilize the best available option for rollover, which may not necessarily be an IRA.

That said, if one decides to go ahead with the rollover due to cessation of employment, or other factors weighing the different types of individual retirement accounts may be helpful. To be sure of which rollover best suits one's financial planning needs, carefully considering all the options available within each retirement investment vehicle can be beneficial and help inform one as to the financial possibilities. Also, becoming aware of the rules, contributions amounts, taxation of, and age limits on various retirement plan options may help one be better prepared for the future.

Methods and tools for Rolling over a 403(b)

The first step in proceeding with a 403(b) rollover is speaking with the appropriate financial institutions, trustees and account managers to inquire about the process. Depending on the institution, account, financial instruments within the retirement plan etc. different forms may be required. A few of the possible forms needed are provided below.

Forms needed for direct 403(b)-IRA rollover (investopedia.com):

• Direct rollover transfer application
• Contribution form signed and dated by IRA institutions
• Distribution request form
• Acceptance of transfer from IRA provider

Additionally, the rollover cannot take more than 60 days upon receipt of funds from the recipient if the 403(b) beneficiary is the recipient. In other words, if one's employer and IRA servicer are not facilitating the rollover from start to finish, the money could pass through the pension beneficiaries hands. In order to avoid incurring tax on these funds they must be re-deposited and traceable as such into the IRA within the 60 day time limit

Determine the type of Individual Retirement Account (IRA)

Once one has performed the direct rollover of the 403(b) into an individual retirement account, that individual may want to roll it over to another IRA such as a Roth IRA. 403(b)'s cannot be rolled directly into an Roth IRA but the IRA can be rolled over into a Roth. IRA's and Roth IRA's have different rules, salary requirements and contribution age limits that may make a second rollover worthwhile. There are several benefits associated with Roth IRA's that could outperform the advantages of retaining a 403(b) or only rolling over into an IRA. Those benefits associated with Roth IRA's are listed below:

Advantages of a Roth IRA:

• Higher maximum contribution amounts
• More investment choices
• A Roth IRA can be held simultaneously alongside a 403(b)
• No age contribution limit
• Earnings may not be subject to taxation upon withdrawal
• No required withdrawal/distribution age
• Contributions are made with after tax income therefore is non-taxable after withdrawal
• Only earnings on maximum contributions are taxable
• Has exemptions for early withdrawal ex-education expenses

Summary

Rolling over a 403(b) into an IRA is a process within retirement planning and personal financial management that may come about due to changes in employment, available financial options, physical relocation etc.

After one has weighed the best financial options available and chooses to go ahead with a 403(b) rollover, the steps to rolling over funds without taxation should not be too complicated or take more than 60 days if one is adequately prepared and informed.

Once the rollover is complete, the beneficiary may also want to consider a second rollover into a Roth IRA if one qualifies for such. These decisions are the responsibility of the individual however and may be made with the assistance of a financial consultant.

Sources:

1. http://www.investopedia.com/ask/answers/142.asp
2. http://www.403bwise.com/wisemoves/irarollover_vt.html
3. http://www.fairmark.com/rothira/roth401k/compare-ira.htm
4. http://www.fairmark.com/rothira/taxable.htm
5. http://beginnersinvest.about.com/cs/iras/f/tradvsrothira.htm

What Happens to an IRA With No Beneficiary Designation

Individual Retirement Accounts (IRAs) with no beneficiary designations may automatically pass to a living spouse or transfer to the IRA owner's estate. In the former case, what happens to an IRA with no beneficiary designation is different due to the legal differences between recipients. Moreover, estates can go through a legal process called probate when no spouse or beneficiary designation exists. Probate is the mechanism by which assets and debt obligations are reviewed by a judicial body and distributed by such.

Until an owner of an IRA gives up right to the funds within an IRA, the value and assets within the IRA remain intact and belong to that owner. According to Vanguard, a large financial services firm, what happens to an IRA with no beneficiary designation may depend on the Custodial Account Agreement. That is to say, since the financial services firm is the custodian of the IRA, the terms within that agreement may specify beneficiaries in the event the owner does not. Vanguards policy on the matter is to transfer first to a spouse and then the owner's estate if no spouse exists.

According to Mary Randolph, J.D., in a book named '8 ways to Avoid Probate', contractual wills can and do take precedence over custodial account agreements despite being relatively infrequently used instruments. In other words, if no beneficiary is listed on the IRA, but the agreement automatically has a contingency beneficiary, a contractual will can override the allocation determined by the account.

In the case of a non-designated spouse, two things can happen to an IRA with no beneficiary designation. Either the funds are received in full or they can be held in an inheritance IRA for tax deferral. The advantage of the latter method is the recipient of the IRA funds has more time to determine a more tax beneficial annuity or method of withdrawal. If an estate becomes the first non-designated beneficiary probate may become a requirement that can prolong the transfer and distribution process in addition to adding legal costs.

A reason individuals assign beneficiary designation to their IRA's is to avoid unforeseen financial circumstances and prevent third parties from determining what will happen to the IRA. Moreover, by assigning IRA beneficiary designations to an IRA, the option for less inheritance tax to paid by the IRAs funds exist in addition to the funds being allocated as wished. Designating beneficiaries is to prevent confusion and other adverse circumstances following the passing of the primary owner.

If no last will and testament exists in addition to having no designated IRA beneficiaries, the court may decide to allocate the IRA to the state. This is more likely to occur in the event no surviving relatives exist or when no clear right to claim the property exists. According to the U.S. Internal Revenue Service (IRS) another stipulation may apply to inherited IRAs. Specifically, the IRS states that individuals may only have five years to withdraw the entirety of the IRAs worth.

Sources:

1. http://bit.ly/brDZoU (Internal Revenue Service: Publication 590)
2. http://bit.ly/96FjfO   (Estate Planning Law Firms)
3. http://bit.ly/c9KnLp (Mary Randolph, J.D.)
4. http://bit.ly/aXj2vw  (Vanguard)

Roth IRAs 101

In the numbers game of managing money, a Roth IRA can be a useful financial instrument to hedge against a possible increase in taxes during one's retirement years and a useful way to invest through a retirement instrument.

• Qualification: Roth IRA's are for employed people or the spouses of employed people. Money acquired through investments do not qualify for income in this case. This is a financial vehicle for working class through the upper middle class as the income limits for opening an account can be no higher than 160K depending on filing status. For individuals and married persons filing separately, the earnings cap is set at $95-$110K with contribution phase out rules starting at 95$K, and for married persons filing jointly $150-160K with contribution phase out starting at $150K.

• Benefits: The benefits of Roth IRA's can include tax free capital gains and/or dividend income so long as the earnings are acquired are through the Roth IRA account. Also, there is no age limit to contribution nor is there a mandatory withdrawal required after a certain age is reached. This type of account can also be a useful hedge against complications in future government social security contributions.

• How to open an account: To open a Roth IRA one can either transfer a traditional IRA into a Roth or establish a new account with a banking institution provided that one is legally entitled to open such an account. Annual contributions can be no more than $4K for persons age 50 or lower and $5K for 51 or older with no age ceiling. Certain rules and restrictions may apply to persons with incomes near the cap range and self employed individuals.

• Tax benefits: The tax benefits of Roth IRA's are back end meaning the money deposited in a Roth is taxed i.e. not deductible on a tax return. However, it is not taxed upon withdrawal and may qualify for a retirement savings tax credit if you're over 20 as of 2007 and your adjusted gross income is less than $50K if married filing jointly or more than $25K filing singly.

Tips on Opening a Roth IRA

As with many financial decisions the choices one makes are best applied to one's own circumstances. If one needs retirement contribution money for living expenses, a family emergency or some other unforeseen event the money contributed to a Roth is subject to taxation and a possible 10% penalty if withdrawn early. In other words, if you're going to need the money don't lock it up.

Secondly, the benefit of a Roth IRA is essentially as a tax hedge and savings regimen. If one has fiscal discipline and can gain a return higher than the tax savings incurred from both a predicted future tax adjustment and the tax savings on investments through the Roth IRA it may be better to choose other financial instruments.

Third, the tax free withdrawal incentive only becomes active at 59.5 years of age and beginning at least the fifth year after initial contribution. The earlier and more one contributes to this account the better the tax savings will be IF taxes rise and/or your income tax bracket lowers after retirement.

In retrospect, one of the best benefits of a Roth IRA is the tax free income within the account. This can be a significant advantage in taxation because money that could earn 10% a year in a non-retirement account that is taxed as short term capital gains loses 10-35% outside of a non-tax sheltered investment vehicle.

To illustrate, if one's taxable income is the 15% tax bracket and acquires $5,000 in capital gains every year for 20 years, those capital gains will be taxed 15% a year or 15%*(5K*20 years)=$1500.00. Had that same money been in a Roth IRA, not only would the earnings be tax free saving $1500.00, the $1500.00, but the $1500.00 could also be used to leverage more investments for a potentially greater gain overall.

Why you should retire

Why you should retire is a question some might not need to ask, but for those that do, there are plenty of reasons why. Retirement is an opportunity that opens doors that were previously closed prior to retirement.

Sometimes, retirement is a necessary step in life that makes possible new steps in different directions. Whether the retirement is voluntary or involuntary, some of those newly opened doors have dollar signs behind them.

• Employer provides severance package

Some employers will pay you to retire and don't give you a choice about it. Some employment contracts have clauses allowing severance pay under certain conditions. If such is the case, the severance package may entitle you to enough extra funds to consider retiring.

• Retirement hobby supplements income

If you've chosen to retire to pursue a hobby that otherwise would have been an unimplemented pursuit, that hobby may be monetized with the right decisions. In such case, retirement not only allows a chance to do something you enjoy and want to do, but also provides a potential additional source of retirement income, both of which could not be accomplished as easily without first retiring.

• Traditional IRA requires withdrawals

If you've reached the mandatory distribution age for Traditional Individual Retirement Account (IRA) withdrawals, there may not be enough time to spend it without retiring. Of course, this is something not every retiree has the luxury of, but it is a reason that many people have in their retirement financial tool box.

• You have a reverse mortgage

A reverse mortgage pays homeowners back based on the equity value of the home. This type of payment may supplement a retirement income to financially justify retirement. If the income isn't used, it can be reinvested to potentially earn retirement income at a higher yield than the housing market might provide. This type of income could also help finance retirement in later stages.

• Social Security Income allows it

In addition to IRA and reverse mortgage distributions, you may also qualify for Social Security payments. These payments may put your income over the top if you have several other sources of retirement income. Financially, there simply may be no reason why you should not retire if this is the case.

• You've become the recipient of a marital trust

For families with large estates, a marital trust may have been created to avoid heavy taxes upon death of a surviving spouse. Marital trusts make use of estate tax exemptions by passing on assets through a trust that optimizes tax benefits. An example of a martial trust is the A/B trust which divides inherited assets between a spousal and other beneficiary trust.

Several of the above reasons why you should retire are geared toward those whose retirement options and benefits apply by default. However, with the right decision making and financial planning, additional reasons why you should retire may also exist.

Even if you haven't reached retirement age, there may still be ample rationale for why you should retire. Moreover, unless you love your job, require one, and/or it brings you happiness beyond any motive for why you should retire, then there are plenty of explanations why you should retire sooner, rather than later if those reasons are financially workable.

How to Set Up an IRA

An IRA is an Individual Retirement account that allows individuals to make annual contributions without taxation until the age of 59 . Detailed information on IRA's can be found in the Internal Revenue Services publications 575 and 590. After this age, withdrawals can be made from the IRA without early withdrawal penalty. Several types of IRA's exist, each with different rules and requirements. There are several steps that one can take to effectively establish, contribute to, and benefit from an IRA. This article will present a guideline by which and IRA can be set up.

Decide if an IRA is the right retirement instrument

Since there are several ways to save for retirement and hedge against taxes, a choice exists as to how one should go about planning for retirement and what investment vehicle(s) to choose. Individual Retirement Accounts can be used in conjunction with other retirement instruments but there is an annual limit to the amount an individual can contribute to an IRA.

Questions to consider when deciding to open an IRA can include how much excess money one has to contribute, what kind of percentage return on Investment to expect, and if the money deposited into the IRA will be needed before retirement. The answers to these and other questions can help one know whether an IRA is practical, feasible and profitable in terms of one's retirement goals.

Differentiate between types of IRA and determine qualification

When thinking about whether or not an IRA may be a good choice it may be a good idea to become familiar with the various types of IRA, if one qualifies to set up an IRA and what the benefits and advantages of different IRA's are. Some IRA's do not allow any early withdrawals whereas others such as the Roth IRA allow withdrawal of money earned on the original investment without penalty. However, unlike regular IRA's, Roth IRA's are not tax deductible but may qualify for a retirement tax credit.

Additional factors that determine whether or not one qualifies for an IRA include annual income, employment status, tax filing status and pre-existence of an IRA in one's name. Generally, to be able to contribute to an IRA, one's income must not be higher than $116K per year if single or $169K if married. One may also not intend to spend the money in an IRA or be very young in which case a Stretch IRA or Children's IRA may be more practical. Distinguishing and ascertaining which IRA is most suitable, may also be assisted by a representative from the financial institution with which one establishes the IRA.

Select an Employer IRA of Financial Institution to Set up the IRA with

Once one has decided if an IRA is a good choice and become familiar with the terminology, rules and types of IRA, a good next step is to research and contact financial institutions. Many financial institutions have IRA plans with various benefits and drawbacks. Some firms may offer convenience, flexible choice of investments, or favorable interest rates. Additionally, one may want to be sure the financial institutions one establishes and IRA through is also financially sound, reputable and suitable enough to be able to facilitate adjustments and/or rollovers of the IRA if need be.

Depending on the type of IRA one has, one may not require the direct assistance of a financial institution in initially setting up the IRA. In such case one may not have to make any contributions until the employment term ends at which point the IRA can be rolled over to another IRA account with a different organization. What's more, some employer funded IRA's have higher annual contribution amounts which may be part of an overall employment benefits package. Speaking with an employer about the IRA can help one understand whether or not one is able to and/or wants to continue funding the IRA through the employer.

Complete Paperwork and Sign

Once one has decided, considered and selected if, what type and which organization one wants an IRA with the next step is to read the IRA terms of service, contractual details and application materials. If the all the information is in accordance with one's knowledge, expectations and goals one may then complete the IRA application and/or paperwork to open the account.

This paperwork may also include privacy disclosures, automatic withdrawal and terms of agreement. After completing the paperwork one may then sign and date it and possibly write a check for the initial contribution amount. After this point the information and funds will be processed by the organization with which the IRA is established and the account them becomes active.

Summary

Individual Retirement Accounts may seem like an easy decision on the surface, but there are actually quite a few regulations, rules and variances that govern and differentiate IRA's. The steps outlined in this article can assist with the process of correctly setting up an IRA. Of significant relevance when opening an IRA, is a careful assessment of one's available funds, future cash flow, financial goals and preferences, and qualification status for opening the IRA.

After all is said and done, if one is not happy with the IRA after having set it up, or if one's situation changes, one may simply withdraw all the funds and close the account with penalty if done so before the pre-established age limit or roll over the IRA into another IRA without penalty.