The rules for IRAs have always been complicated, and penalties can be levied when mistakes are made.
Adding assets to an IRA is only simple when they are being automatically deducted from your paycheck! To contribute assets or transfer funds into your IRA, pay careful attention to the rules and let an experienced estate planning attorney help you before you make a costly mistake. For instance, what if you wanted to move a stock account into your IRA?
Unfortunately, it’s not as easy as transferring stocks from one account to an IRA. The rules stipulate that IRA contributions must be made in cash—that means you can deposit a check, electronically transfer cash between accounts at different financial institutions or authorize an internal cash transfer between accounts at the same bank.
Selling some stock in a non-retirement account is an option to free up enough cash to make an IRA contribution, but NJ 101.5’s recent article, “Moving your money to an IRA,” explains that first you should look into whether a contribution to a traditional IRA or a Roth IRA is a better option.
Each type of IRA must be in a separate account. Whether you need to open a new IRA depends on your desired IRA contribution type and what kind of IRA you already own. Also, it’s important to note that contributions into a SEP-IRA or Simple IRA have a different set of rules.
With a traditional or Roth IRA, you can make an annual contribution up to $5,500 or 100% of earned income—whichever is less. In addition, if you’re at least age 50 and have more earned income, you can also contribute an extra $1,000, which is called the “catch-up” contribution.
You can make an IRA contribution at any time during the year, but you have up until April 15th of the following year to make your contribution. There aren’t any extensions, even if the IRS grants you an extension to file your income taxes.
With a traditional IRA, the contributions are deductible, but only if you or your spouse aren’t a participant in a qualified company retirement plan—like a 401(k) or profit-sharing. If you are a participant, your ability to deduct a traditional IRA contribution is phased out at $61,000 adjusted gross income (AGI) for singles and $98,000 for a married couple. Your spouse’s ability to deduct a contribution starts to phase out at $183,000 if only you are a participant in the qualified plan.
You can’t contribute to a traditional IRA if you are over 70½, despite having had earned income.
IRA distributions are usually taxable. They are also subject to a 10% early withdrawal penalty prior to age 59½, and minimum withdrawals are required after age 70½. For a Roth IRA, contributions are never deductible, but distributions are typically tax-free.
Whether or not you can contribute to a Roth IRA plan depends in part on your age and if you are participating in a qualified plan, but overall your ability to contribute to a Roth IRA is phased out at certain levels: $117,000 AGI for singles and $184,000 for marrieds. One of the pluses of a Roth IRA is there are no minimum distributions; however, the earnings portion of distributions may be taxable and/or subject to a penalty if the Roth wasn’t opened for five years, but this depends on your age. Keep in mind that there are different rules for people who fall into one of three categories: under age 59½, between the ages of 59½ and 70½, and over 70½. Talk with an estate planning attorney who can help guide you through the complexities of IRAs.
Reference: NJ 101.5 (September 7, 2016) “Moving your money to an IRA”