IRA (Individual Retirement Account)
Frequently Asked Questions
Am I eligible for an IRA?
How do I open an IRA?
What is compensation?
How much can I contribute to my IRA?
Do I pay taxes on the earnings of my IRA?
Do I get a tax deduction for my contribution?
What if I’m not eligible for a deductible IRA contribution?
When can I withdraw funds from my IRA without incurring any IRA penalties?
How are the funds taxed at distribution?
What happens to my IRA in the event of my death?
What is a spousal IRA?
How do I move funds from one IRA to another?
How do I move funds from a qualified plan or Tax-Sheltered Annuity (TSA) to an IRA?
When is the contribution deadline for funding an IRA?
If you are under the age of 70 ½ for the entire tax year and have compensation, you are eligible to establish an IRA, even if you already participate in any type of government plan, tax-sheltered annuity, Simplified Employee Pension (SEP) plan, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), or qualified plan (pension or profit sharing) established by an employer.
Simply see any of our IRA Representatives. We will explain the nature of these accounts in more detail and help you complete the simple forms necessary to establish your IRA with Exchange Bank.
Compensation is the salary or wages you receive as an employee. If you are self-employed, compensation is your net income for personal services performed for the business. All taxable alimony is considered compensation. Passive income such as interest, dividends, and most rental income is not considered compensation for purposes of funding an IRA.
How much can I contribute to my IRA?
You may contribute any amount up to 100 percent of your compensation or $4,000.00 under age 50 and $5,000.00 age 50 and over. (Whichever is less).
Do I pay taxes on the earnings of my IRA?
All earnings on your IRA contributions of (deductible and/or nondeductible) remain tax deferred until you make withdrawals from the account.
Do I get a tax deduction for my contribution?
Deductibility of you contribution is based on whether or not you are an active participant in an employer-maintained retirement plan. If so, the deductible amount is dependent on your modified adjusted gross income (MAGI) and income tax-filing status. You may be eligible for the maximum deduction, a partial deduction, or no deduction.
What if I’m not eligible for a deductible IRA contribution?
You can still make nondeductible contributions to your IRA.
When can I withdraw funds from my IRA without incurring any IRA penalties?
You can withdraw funds from your IRA without the 10 percent IRS premature-distribution penalty any time after you reach age 59 ½, if you become disabled, when the distributions are part of certain periodic payments, and for medical expenses in excess of 7.5 percent of you adjusted gross income or for health care insurance if you’ve been receiving unemployment compensation for at least 12 weeks. When you reach age 70 1/2, you must begin to take minimum required withdrawals or severe penalties will be imposed.
How are the funds taxed at distribution?
If you are over age 59 ½, simply include the taxable portion of the amount withdrawn (generally deductible contributions and all earnings) as income. However, if you are under age 59 ½ and do not meet one of the exceptions, you must also pay a 10 percent IRS penalty for premature distribution. The nondeductible portion of the distribution is not taxable when withdrawn nor is it subject to the 10 percent premature-distribution penalty.
What happens to my IRA in the event of my death?
Your named beneficiary (ies) will receive the entire proceeds of the IRA. The manner in which your beneficiary (ies) receives the funds is determined by the election made by your beneficiary (ies) within the guidelines of the law.
The spousal IRA rules allow a married person to make an IRA contribution for his/her spouse. A couple can contribute up to 100 percent of their combined earned incomes or $4,000.00 (2,500.00 for 1996 tax year), whichever is less. The amounts can be divided in any manner between the two IRAs, as long as no more than $2,000.00 is contributed to either IRA.
How do I move funds from one IRA to another?
There are two methods you can use to move funds from one IRA to another: rollover and transfer. For a rollover, you have 60 calendar days from the date of receipt to roll over the distribution to another IRA. Rollovers from IRAs may not occur more than once during a 12 month period (this rule applies to each separate IRA you own). A transfer occurs when the funds are moved from one IRA to another without you having control or custody of the funds. There are no time or frequency limits on the number of transfers permitted.
How do I move funds from a qualified plan or Tax-Sheltered Annuity (TSA) to an IRA?
An eligible qualified plan or TSA distribution may be either directly rolled over (direct rollover) or rolled over (rollover) to an IRA. Generally, an eligible rollover distribution is any distribution except one that is (1) one of a series or substantially equal periodic payments over the single or joint life expectancy of the employee and beneficiary or for a specified period of ten years or more and (2) a required distribution for an employee aged 70 ½ or older.
A rollover occurs when funds distributed from your qualified plan or TSA are paid directly to you then subsequently rolled over by you into an IRA within 60 days.
A direct rollover is a qualified plan or TSA distribution that is sent directly from the plan administrator (employer) to an IRA.
Qualified plan and TSA distributions paid directly to you are subject to a mandatory 20 percent federal income tax withholding at the time of distribution. Funds moved to an IRA via a direct rollover are not subject to withholding.
As with an IRA-to-IRA rollover, a qualified plan or TSA recipient has 60 calendar days form the date of receipt to roll over the taxable portion of the distribution to an IRA. The 12-month limitation does not apply to rollovers from qualified plan or TSA into an IRA.
When is the contribution deadline for funding an IRA?
IRAs for the taxable year can be opened and funded any time between January 1 and the date your tax return is due for the year, excluding extensions. This due date is normally April 15 of the following year.
