Commonly Asked Questions

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These FAQs are provided as a resource to help you find answers to some of the most commonly asked questions. Simply click on the appropriate category below to be driven to your related question, or scroll through all questions.

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IRA-Related Questions

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Tax-Related Questions

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Retirement Plan Questions

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Non-Retirement Account Questions

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FAQs

Here are answers to some frequently asked questions regarding IRAs and other retirement plans, non-retirement accounts, trusts, and tax considerations.

IRA-Related Questions

What is a Roth IRA?

A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied. Established in 1997, it was named after William Roth, a former Delaware Senator.

Roth IRAs are similar to traditional IRAs with the biggest distinction between the two is how they're taxed. Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible. But once you start withdrawing funds, the money is tax-free. Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.

What are the contribution limits for a Roth IRA?

Only earned income can be contributed to a Roth IRA. You can contribute to a Roth IRA only if your income is less than a certain amount. The maximum contribution for 2021 is $6,000; if you're age 50 or over, it is $7,000. You can withdraw contributions tax-free at any time, for any reason, from a Roth IRA.

When are Roth IRA Required Minimum Distributions (RMDs)?

Unlike traditional IRAs, there are no RMDs for Roth IRAs during the account owner's lifetime. Your account's beneficiaries may need to take RMDs to avoid penalties.

What is a Traditional IRA?

A traditional individual retirement account (IRA) allows individuals to direct pre-tax income toward investments that can grow tax-deferred. The IRS assesses no capital gains or dividend income taxes until the beneficiary makes a withdrawal. Individual taxpayers can contribute 100% of any earned compensation up to a specified maximum dollar amount.

Income thresholds may also apply. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors.

What are the contribution limits for a Traditional IRA?

There are no income limits for Traditional IRAs,1 however there are income limits for tax-deductible contributions.

When are Traditional IRA Required Minimum Distributions (RMDs)?

You must take required minimum distributions (RMDs) from a traditional IRA starting at age 72. Unlike traditional IRAs, there are no RMDs for Roth IRAs during the account owner's lifetime.

What is an Inherited IRA?

An inherited IRA is an account that is opened when an individual inherits an IRA or employer-sponsored retirement plan after the original owner dies. The individual inheriting the Individual Retirement Account (IRA) (the beneficiary) may be anyone—a spouse, relative, or unrelated party or entity (estate or trust). Rules on how to handle an inherited IRA differ for spouses and non-spouses, however.

Can you make contributions to an Inherited IRA?

As a beneficiary, you can't make additional contributions, but with an Inherited IRA the funds can remain tax-deferred, and you can generally withdraw money right away without a penalty.

When are Inherited IRA Required Minimum Distributions (RMDs)?

When you inherit an IRA, many of the IRS rules for required minimum distributions (RMDs) still apply. However, there may be additional rules based on your relationship to the deceased original owner.

How Are IRA Withdrawals Taxed?

The way individual retirement account (IRA) withdrawals are taxed depends on the type of IRA. You'll pay tax on withdrawals from a Traditional IRA, but with a Roth IRA, there is no tax due at withdrawal on either contributions or earnings, provided you meet certain requirements.

In general, early withdrawals—before age 59½—from any type of qualified retirement account, such as IRAs, come with a 10% penalty, as well as any income taxes due, though there are some exceptions to this rule.

What is the difference between an IRA transfer and a rollover?

The difference is the type of account being moved. In a transfer, you are usually moving an IRA to another IRA directly. In a rollover, you are usually moving an employer-sponsored plan to an IRA, and this can be direct or indirect.

Tax-Related Questions

What is the difference between a 1099 and a W-2?

There is one key difference between a W-2 form and a 1099. A Form 1099 is issued to an independent contractor to report their income to the IRS. They pay their taxes since they are self-employed. A Form W-2 is given to an employee to report their income and payroll taxes withheld

Why did I get a 1099 instead of a W2?

If you've received a 1099 Form instead of an employee W-2, your company is treating you as a self-employed worker. This is also known as an independent contractor. When there is an amount shown on your Form 1099-MISC in Box 7, you're typically considered self-employed.

Are rollovers taxable?

A direct rollover can be a distribution from an IRA to a qualified plan, 403(b) plan, or a governmental 457 plan. A direct rollover effectively allows a retirement saver to transfer funds from one retirement account to another without penalty and without creating a taxable event.

The rollover transaction isn't taxable unless the rollover is to a Roth IRA, but the IRS requires that account owners report this on their federal tax return. If an account holder receives a check from his existing IRA or retirement account, they can cash it and deposit the funds into the new IRA.

Can I take an early distribution from certain retirement savings?

Rule 72(t) allows penalty-free withdrawals from IRA accounts and other tax-advantaged retirement accounts like 401(k) and 403(b) plans. This rule allows account holders to benefit from their retirement savings before retirement age through early withdrawal without the otherwise required 10% penalty.

Retirement Plan Questions

What are the differences between the various types of retirement plans?

Whether you are just starting to save for retirement or looking for another vehicle to help maximize your retirement savings, there is a range of retirement plans that can help meet your needs. This 2021 retirement reference guide outlines the key considerations.

2021 Retirement Reference Guide

Non-Retirement Account Questions

What are non-retirement accounts and how do they work?

Non-retirement accounts can come in many forms, but the most common is a taxable brokerage account. You can generally deposit and withdraw money from these accounts without any limitations or penalties unless they are imposed by your brokerage firm or a specific investment. You don't have to roll over these accounts because they have no special tax benefits.

Now are the taxation considerations for non-retirement accounts?

Brokerage accounts are taxed depending on the type of transaction within the account. Whenever you receive taxable distributions from an investment, you pay a tax on them during that tax year. Qualified dividends and capital gains are taxed at more favorable long-term capital gains tax rates.

You also pay taxes when you sell an investment at a gain. Gains on investments held for more than one year typically qualify for more favorable long-term capital gains tax rates. Gains on investments held less than a year are typically taxed at your ordinary income tax rate. Losses on investments can offset investment gains, which may lessen your tax burden.

What is a transfer on death (TOD) designation and how does it work?

The transfer on death designation lets beneficiaries receive assets at the time of the person's death without going through probate. With TOD registration, the named beneficiaries have no access to or control over a person's assets as long as the person is alive.

A TOD account automatically transfers its assets to a named beneficiary when the holder dies. For example, if you have a savings account with $100,000 in it and name your son as its beneficiary, that account would transfer to him upon your death.

What Is a custodial account and how does it work?

A custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities.

What is the difference between a revocable trust and an irrevocable trust?

A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An irrevocable trust describes a trust that cannot be modified after it is created without the consent of the beneficiaries.

When it comes to the protection of assets, an irrevocable trust may be better than a revocable trust. Again, the reason for this is that if the trust is revocable, an individual who created the trust retains complete control over all trust assets.

Does a trust have to go through probate?

No, that is one of the benefits of a trust over a will. A will is a written document expressing a deceased person's wishes, from naming guardians of minor children to bequeathing objects and cash assets to friends, relatives, or charities. A will becomes active only after one's death.

A trust is active the day you create it, and a grantor may list the distribution of assets before their death in it, unlike a will. There are irrevocable trusts, often created for tax purposes, which cannot be altered after their creation, and living trusts, which can be changed by the grantor.

All wills must go through a legal process called probate, where an authorized court administrator examines them. This process can be lengthy and potentially contentious if family members contest the will. Trusts are not required to go through probate when the grantor dies, and they cannot be contested.

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