Many people save for retirement through traditional IRAs. Their contributions may qualify for tax deductions depending on their annual income and workplace retirement plan access.
Will they be eligible to invest in several investments, including stocks, bonds and exchange-traded funds (ETFs), but must take withdrawals starting at age 59 1/2 in order to avoid taxes and penalties? Can they have multiple IRAs with similar investments?
Taxes
Traditional IRAs allow you to invest pre-tax dollars tax deferred until retirement; withdrawals prior to age 59.5 will generally incur an ordinary income tax rate with a 10% penalty, though there may be exceptions.
Individual Retirement Account (IRA) contributions may be tax-deductible for those unprotected by workplace plans, depending on your income bracket and savings goals. An IRA could make more sense than traditional savings accounts in this regard if you anticipate being in a lower tax bracket in future.
However, like all good things, an IRA’s tax-deferral must eventually come to an end. Every year, you are required to withdraw a certain amount from your account known as a required minimum distribution (RMD), though you can avoid taxes by taking these withdrawals in equal monthly payments over five years or until age 59 1/2 whichever comes first.
Investments
Investment growth within an IRA is tax-deferred until distributions are taken from it; then you will pay taxes on both income and capital gains as you would under regular circumstances. This policy helps ensure that those saving with an IRA generate tax revenue when it comes time to take distributions in retirement.
Everyone with earned income can open and contribute to a traditional IRA; however, deduction limits apply and certain contributions cannot be deducted from income taxes in retirement. Roth IRAs provide another option for those expecting lower tax brackets in their later years of retirement.
If you leave an IRA account to multiple beneficiaries, it may make sense to create individual accounts for them in order to prevent conflicting estate settlement rules for each. Some states consider inherited IRAs marital property while others deem them separate; thus it would be wiser for these inherited accounts not be mixed in with assets owned before marriage and potentially considered marital property by your estate planners. To protect yourself and ensure maximum efficiency when leaving an inheritance account behind it may make sense for each of the accounts, whether they were acquired personally or from someone else.
Beneficiaries
Traditional IRAs allow for tax-deferred growth; however, when withdrawing funds they’ll be taxed at ordinary income rates and the beneficiary should be carefully considered before withdrawing funds from them.
Before, you could reduce your taxes by stretching out withdrawals from an inherited IRA over your expected lifespan. Due to recent legislative changes and IRS guidelines, however, your options have now become significantly limited.
Spousal inheritors can treat their accounts like their own and set their own RMD schedule, while non-spouse beneficiaries must take out distributions over 10 years to meet RMDs – this limits popular “stretch” strategies which allow many heirs to avoid income taxes for decades.
Consideration should also be given to early withdrawal penalties. If you withdraw funds before age 59.5 from an IRA, an early withdrawal penalty of 10% applies in addition to ordinary income tax; there are exceptions, however; such as using it for purchasing your first home or covering unreimbursed medical expenses.
Administration
No matter if you choose to keep accounts separate or combine them, beneficiaries designations allow you to control how your assets will be divided upon death. You can name both primary and contingent beneficiaries; such as spouses or children, trusts, charities or family businesses – they override any instructions in a will.
Traditional IRA withdrawals are subject to income taxes, but you can avoid incurring a 10% early withdrawal penalty by taking “substantially equal periodic payments” throughout your life based on all nondeductible contributions plus earnings on these assets.
if you need assistance managing your retirement savings, SmartAsset’s free tool can connect you with qualified advisors in your area – free interviews to determine their suitability – or you could establish a managed IRA through an online broker or robo-advisor to gain expert guidance at reduced fees. They use automated technology to select investments based on your goals and investing horizon, with low fees typically charged per transaction.
