IRAs to help children is a wise financial decision.
Can children have IRAs? There is no minimum age for having an IRA. Due to the power of compound interest, saving tax-free in an IRA from childhood on can provide a huge head start on financial security. Saving $5,500 in an IRA annually from age 14 through 24 and earning 7% per year provides $1.06 million at age 61—even without contributing after age 24!
1. Open an IRA for every child who has earned income. The yearly contribution limit is $5,500 or the amount of the child’s earned income, whichever is less. Any kind of paying work will do: babysitting, waiting tables, and so on. Wages can come from a family business. Note: for a minor child (under age 18 to 21, depending on state law), you will need to set up a “guardian IRA” account. These are offered by many banks and financial institutions.
When it comes time to rollover your employer 401(k), what are your best options? Most think the best solution is to rollover your plan to an IRA. Here are six options to evaluate before making a decision. These are available to plans with employees – not all options will apply to sole proprietor plans. Most options will not apply to SEP and SIMPLE plan participants.
1. Rollover to an IRA. There are a lot of benefits to this option. Rolling over to an IRA is a tax-free transaction when a direct rollover is used to move the funds. IRAs have more investment choices and are more flexible when it comes to distributions and financial planning. You generally get better service from your advisors than you will get from the 800 number for the plan.
IRA owners can clearly combine the accounts they own and they can combine the required minimum distributions (RMDs) from multiple IRAs and take them from any one or combination of their IRAs. The rules for combining Inherited IRAs and RMDs are more complex.
An IRA owner cannot combine IRAs they own with IRAs that they have inherited, unless the inherited IRA came from their current spouse. IRAs that are inherited from the same person can be combined, as long as the RMD calculation is done in the manner for all of the inherited IRA accounts. Generally, this is easy. If Dad had two IRA accounts and you inherit half of each of those accounts because you are named on the beneficiary forms for those accounts, then you can combine them. If you keep the accounts separate, you can calculate the RMD on each account and then combine it and take all or any part of the RMD from either account as long as you take the full RMD.
When it’s time to consider signing up for Social Security, turn to your financial advisor for advice and recommendations. Social Security is challenging with numerous complex rules that are confusing. Recent changes have added to the difficulty in how to correctly interpret the law’s meanings and how choices can impact you long-term. Often, those who are relying on Social Security Administration (SSA) assistance, find their recommendations are not the best choices for their unique situation. Read on for tips on claiming Social Security.
The Social Security Administration has received criticism. The U.S. Senate Special Committee on Aging urged the SSA to improve the recommendations it provides to individuals. Their concern was based on a U.S. Government Accountability Office (GAO) report that emphasized inconsistencies in the recommendations that the SSA and its claims personnel were giving to people applying for benefits.
We constantly see questions regarding the distribution rules for Roth IRAs. Personally, I’ve always thought that the failure to understand these rules prevents many from truly appreciating the benefits of these accounts. Traditional IRAs are easy. Unless we are talking about nondeductible contributions, the money is deductible when contributed and taxable upon withdrawal. There’s also the early distribution penalty that could apply depending on the circumstances.
Roth IRAs have a couple of different rules, including two separate 5-year rules. The easiest way to understand these rules is to remember that a Roth IRA consists of two parts: (1) contributions/conversions and (2) investment gains/losses. This is important because contributions can always be withdrawn at any time, tax and penalty free. The earnings, however, are potentially taxable and could be hit with the early distribution penalty.
Understanding the difference between IRA & Designated Beneficiaries
IRAs have beneficiaries and “designated beneficiaries,” and it is important to know the difference. If you wish your heirs to have the opportunity to take full advantage of “stretch” IRAs, and to avoid other possibly costly mistakes, be sure your heirs are designated beneficiaries. Here’s the difference and why it matters.
The beneficiary that inherits an IRA can be an individual or a legal entity such as a charity or an estate. But a designated beneficiary must be a living person ‘with a pulse’ who is named on the beneficiary form of the IRA.
The major advantages of a designated beneficiary are:
Distributions from inherited IRAs can be stretched over a designated beneficiary’s lifetime, possibly allowing decades of tax-favored investment returns to be earned in the IRA.
The IRA passes directly to a designated beneficiary, escaping complications like probate.
Not all contributions to IRAs belong there. When a contribution is not permitted in an IRA, it is an excess contribution and needs to be fixed. Some excess contributions are easy to understand. Others may be a bit trickier to grasp. Here are 7 ways an excess IRA contribution can happen to you:
1. Blowing Past the Annual Limit
If you contribute more than the annual limit to an IRA for the year that will be an excess contribution. For 2018, the limit is $5,500 for those under age 50 and $6,500 for those who are age 50 or over. This may seem like an easy rule to follow. You may wonder who is go spouse’s taxable compensation to fund your IRA, you may not use a multitude of different income sources including social security, rental income and investment income. You may have a high income, but not be eligible to fund an IRA. If you go ahead anyway, the result is an excess IRA contribution.
Not everyone is eligible to make an annual Roth IRA contribution. We have seen several cases recently of individuals who contributed for many years until they discovered they were not eligible to make any Roth IRA contributions. Here is what you need to know.
First, you must have earned income in order to make a Roth IRA contribution. That means you must perform some type service to have earned income. Passive sources of income generally do not count. As a result, Social Security and payments from any type of retirement plan are not earned income. Rental income is generally not earned income. Investment income and interest income also do not qualify. Disability income will not qualify.
Many people think that if they have after-tax income they can put it into a Roth IRA. This is not true. Gains on the sale of a home or from investments cannot be contributed to an IRA just because they are after-tax funds.
Change can be good. Is your IRA ready for a change? Maybe you are looking for a new type of investment or maybe a new IRA custodian. To change it up with your IRA, you may need to move your IRA funds. Here are 10 things you should know before moving an IRA.
1. The best way to move your money from one IRA to another is to do a trustee-to-trustee transfer. Your funds will not be distributed to you, instead they will move directly from your old IRA to the new IRA of your choice. Usually this can be done by requesting a transfer. Your current custodian will then send your IRA funds to your new IRA custodian.
2. A check made payable to a new IRA custodian for the benefit of your IRA but sent to you counts as transfer. Because the check is not made payable to you, you never have receipt of the funds. That is why it is still considered a direct transfer.
An inherited IRA can be a great thing for the beneficiaries. It is almost like winning the lottery or the Reader’s Digest sweepstakes. You get income for life, or do you? It is all too easy to miss out on this opportunity. The following apply to beneficiaries who are named on the beneficiary form. Beneficiaries who inherit through an estate or trust have different rules.
1. Relying on the IRA Custodian – The company that is holding your inherited IRA will let you know what the best option is for you, right? Wrong. They are not required to give you any information. In fact, their only obligation is to issue the appropriate tax reporting for transactions that are made on the account, and many times they don’t even get that right.