IRA Investment FAQ
Q: Should I get a traditional or Roth IRA?
A: This depends on how much money you earn and your current and future tax brackets. Other things being equal, a Roth IRA will save you more money only if you end up in a higher tax bracket at retirement than you were before. For 2011, if you are single and your annual income exceeds $122,000 ($179,000 if you are married and file jointly) your only option will be a traditional IRA.
Q: Can I contribute to an IRA if I'm retired?
A: You can only contribute to an IRA if you have earned income.
Q: Can I contribute to a traditional and Roth IRA in the same year?
A: Yes, provided you do not exceed the contribution limit for the year. For 2011, the combined limit for those under 50 is $5,000. For those who will be 50 by the end of 2011, the combined contribution limit is $6,000.
Q: Can an IRA be placed in a trust account?
A: While it is possible to place an IRA into a trust, it is not advisable. Anyone considering placing an IRA into a trust account should first consult with a qualified financial or tax advisor.
Q: Can I put money back into my IRA after I take some out?
A: If you are under age 70 ½ and have taken money out of your IRA as a loan, then yes, you can put back in what you've taken out. If you have begun receiving mandatory distributions after age 70 ½, then no, you cannot put back what you have taken out.
Q: What are the advantages of having a Roth IRA vs a traditional IRA?
A: Roth IRAs have a few benefits beyond their tax-advanage for certain individuals. The 10% early withdrawal penalty only applies to the earnings portion of a Roth IRA, allowing you to withdraw principle at any time without added fees. The 5-year holding rule is also waived. Roth IRAs also have no required minimum distribution and do not force you to take money out at age 70.5.
Q: Can an IRA be used as collateral?
A: No. An IRA cannot be used as collateral for a loan.
Q: Can I borrow money from my IRA, repay it, and still take advantage of tax-deferral?
A: No, unlike with a 401(k) you cannot borrow from your IRA. All IRA withdrawals are taxed at your ordinary income rate.
Q: Can an educational IRA be converted to a Roth IRA?
A: Yes. However, the amount that is converted will be subject to both state and federal income taxes.
Q: Can I invest IRA money in foreign investments?
A: Yes. You can invest IRA money in mutual funds and electronic traded funds (ETFs) that invest in foreign companies and exchanges. You can even trade foreign currencies in an IRA.
Q: Can I open a Roth IRA for my son or daughter?
A: You can only open an IRA for your son or daughter if he or she has earned income.
Q: Can I open multiple IRA accounts?
A: Yes. However, you cannot exceed the contribution limit for the year. For 2011, the combined limit for those under 50 is $5,000. For those who will be 50 by the end of 2011, the combined contribution limit is $6,000.Yes. You are free to move your IRA account to a qualified custodian once every 12 months.
Q: Are Roth IRA dividends taxable?
A: If the dividends are paid within the Roth IRA account, dividends earned are not taxable.
Q: How many IRA rollovers can I do in a year?
A: You can rollover an IRA once per year.
Q: Can I withdraw money from my IRA if I'm disabled?
A: Yes. The distribution will be taxable, but it will not be subject to the 10% penalty if you are under age 59 ½
Q: Can an annuity be rolled over into an IRA?
A: If the annuity is part of a tax-qualified account it can be rolled over into an IRA. An annuity, however, may be subject to surrender charges. Further, the owner of the annuity must rollover an annuity according to 1035 exchange rules or he or she will be subject to a 10% penalty regardless of whether the money is deposited into a qualified account within 60 days.
Q: Can I put more money into my IRA this year if I didn't fund it the previous year?
A: Yes. The amount of one year's contribution is not dependent on another year's contribution.
Q: Is there a minimum deposit to open a Roth IRA?
A: While the minimum amount to open a Roth IRA will depend on the company that serves as the custodian of the account, the usual minimum is $500.
Q: When must I begin taking distributions from my traditional IRA?
A: You must begin taking distributions from a traditional IRA by April 1 of the following the year you turn 70 ½.
Q: Can I own precious metals inside my IRA?
A: Yes. Actual precious metals, mutual funds, and ETFs (Exchange Traded Funds) that trade precious metals can be included in an IRA account. Actual precious metals are subject to different rules and regulations than stocks and bonds, so it's always best to seek the advice of a qualified financial planner.
Q: Are IRAs protected from lawsuits and liens?
A: While state laws vary based on the type of case and the type of account, in most cases the answer is no. IRAs are not protected from lawsuits and liens.
Q: Is an inherited IRA taxable?
A: An IRA that is inherited by a spouse is not taxable, provided the spouse is younger than 70 ½ and does not take distributions. An IRA that is inherited by a child or grandchild will be taxable, but will be taxed on the amount of the distributions that will be made based on his or her life expectancy. In other words, if the owner of an inherited IRA is not the spouse of the deceased, he or she must begin taking distributions within the first year, regardless of age. The amount of the distributions, and therefore the taxes paid on the distributions, will be based on his or her life expectancy at the age at which the inheritance occurs.
Q: Are IRA losses tax deductible?
A: Yes. IRA losses can be deducted. However, there may be additional tax implications that can be triggered by deducting losses in an IRA account. Be sure to consult with a qualified tax or financial planner before attempting to claim IRA losses as a deduction.
Q: What are some good books about IRAs?
A: Some of the best and most current information about IRAs can be found online. Entering search terms such as "IRA Rollover", "Funding an IRA", or "Best Stocks for an IRA" will yield several results from qualified sources such as brokerage firms, mutual funds companies, insurance companies, and banks.
Q: When rolling over an IRA, is it better to have the funds transferred or get the check?
A: A direct transfer is one in which the account owner does not first receive the proceeds before they are deposited into another qualified account. He or she simply fills out paperwork that instructs the current custodian of the account to transfer the funds to a new custodian. An indirect transfer is one in which the funds are paid to the account owner. He or she then has 60 days to deposit the funds into a qualified account. While either option is appropriate for most people, a direct transfer is often the easiest way to rollover an IRA.
Q: How can I withdraw money from an IRA without penalty?
A: Under certain circumstances, money can be withdrawn from an IRA without penalty. However, in almost all of these circumstances, the account owner will still be responsible for paying federal income tax on the early distribution. Penalty-free withdrawals can be taken:
- If the account owner is permanently disabled
- To pay for non-reimbursed medical expenses that exceed 7.5% of the account owner's annual adjusted gross income
- To pay the down payment on a first home
- To pay college tuition for the account owner, a spouse, child or grandchild
- To pay taxes owed to the IRS
- To pay medical insurance premiums if the account owner has been unemployed for more than 12 weeks
Q: Is it better to have stocks or bonds inside an IRA?
A: It depends on the account owner's age, risk tolerance, and overall asset allocation. In general, those between the ages of 20 and 40 would have 90% of their IRA assets in stocks and 10% in bonds. Between 40 and 50, the allocation would change to 80% stocks and 20% bonds. Between the ages of 50 and 60, 65% would be in stocks and 35% would be in bonds. Between 60 and 70, stocks would make up 55% of the portfolio and bonds 45%. Finally, once retired, the portfolio would be comprised of 50% stocks and 50% bonds.
Q: What's the best company to go with for opening an IRA?
A: The best company is the one that offers the right level of service and investment options for the account owner. For some this might be a mutual fund company that specializes in growth funds and provides financial consulting services. For othersthis might be a discount brokerage that offers that the ability to trade stocks freely but doesn't provide financial management advice.
Q: Is my IRA FDIC insured?
A: The FDIC (Federal Deposit Insurance Corporation) only insures deposits at banks. The FSLIC (Federal Savings and Loan Insurance Corporation) insures accounts at savings and loans, the SIPC (Securities Investor Protection Corporation) insures brokerage and mutual fund accounts, and the NCUA (National Credit Union Administration) insures accounts at credit unions.
Q: Can stocks from my brokerage portfolio be rolled over into an IRA?
A: If the stocks are part of a non-qualified brokerage portfolio they cannot be rolled over into an IRA.
Q: Is there any reason to keep multiple IRAs?
A: If you've rolled over an IRA from an employer-sponsored 401(k) or other qualified plan, you'll need to keep that account separate from other qualified accounts in order to roll it into a future employer-sponsored 401(k).
While we've covered the basics of IRA investing here, there is much more to maximizing the success of you IRA. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.
More IRA Guidance
- IRA Investment Guide — The complete guide to IRA investing.
- Traditional IRAs — Details about how traditional IRAs work.
- Roth IRAs — Details about how Roth IRAs work.
- SEP IRAs — Details about how SEP IRAs work.
- Roth vs Traditional IRAs — How to choose the right IRA for you.
- IRA Rollovers — How to roll over an IRA and what to watch out for.
- IRA Rules and Limits — IRA contribution limits explained.
- 457 Plans — Detials of how 457 plans work.
- Best IRA Rates — How to maximize earnings in your IRA.