John Bullis: Some regular IRA questions, answers
January 22, 2013
The Individual Retirement Account, known as IRA, is a wonderful thing. It allows you to get an income tax deduction on page 1 of form 1040 (U.S. Individual Income Tax Return). And, the money is still yours!
When you withdraw money from the regular IRA account, it is taxable as ordinary income. By waiting to withdraw money, you postpone taxation, sometimes for many years. In the meantime, the money is invested and the size of the account grows.
Unfortunately, there are many special tax rules about regular IRA accounts. Some of those tax rules are illustrated by the following questions and answers.
Question: Must I have “earned income” like wages or profits from self employment to be eligible to contribute to an IRA?
Question: Is there an age limit to be eligible to contribute to an IRA?
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Answer: Yes. You must be under age 70 1/2.
Question: Can I get IRA distributions before age 59 1/2?
Answer: Yes. Code Section 72(t) allows you to have a series of “substantially equal periodic payments,” but the 10 percent early withdrawal penalty will apply if the series of payments does not continue for the later of five years and age 59 1/2.
The payments or distributions will be taxable income.
There are three choices of methods to determine the payments. Each method requires the use of a life expectancy table (and there are choices of tables).
Question: Can I convert my regular IRA to a ROTH IRA?
Answer: Yes, but the account balance at the time of conversion is taxable income. The ROTH IRA will grow tax free and future distributions will not be taxable income, if the ROTH IRA rules are observed (usually easy enough to do).
Question: If my spouse died and the beneficiary designation of his regular IRA was his estate-and I am the only beneficiary of his estate, can I roll his IRA into my IRA account?
Answer: IRS Private Letter Ruling 201211034 says “Yes.” Do a trustee-to-trustee transfer to a new IRA established and maintained in surviving spouse’s name. Or take a distribution from his IRA and rollover the proceeds in a new IRA in surviving spouse’s name within 60 days.
The private letter ruling is not final law, but it does indicate how IRS views this particular tax issue.
It is better to have good beneficiary designations to avoid problems.
Did you hear? “In a completely rational society, the best of us would be teachers and the rest of us would have to settle for something less,” by Lee Iacocca.
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.