10 Questions IRA Clients May Not Ask But Want You to Answer
By Jodie Norquist, CIP, CHSP
Opening an IRA is a pretty straightforward process. Your clients fill out their IRA plan agreement and other related opening documents and fund their new account with the goal of saving for retirement. From there, they could easily move through the lifecycle of their IRAs unaware of how the IRA rules and regulations—and any changes—affect their accounts. They may make decisions without knowledge of the consequences or opportunities.
Here are 10 questions about IRAs that your clients may not think to ask but will want to know the answers to. Consider addressing some of these with your clients to be sure they get the information they need.
Can I still make a 2020 IRA contribution?
Yes. IRA owners have until their tax-filing deadline, generally April 15, 2021, to make a 2020 IRA contribution. The IRS requires that IRA owners make an irrevocable written election when they make these prior-year contributions. If they don’t, the contribution may be inaccurately reported as a current-year contribution, not only causing headaches for you and your back-office staff, but also your clients when it’s time for them to file their federal tax return. A prior-year contribution is any contribution made between January 1 and April 15 for the preceding year.
I inherited Traditional IRA assets. Can I just let them grow like my other investment accounts?
No. Inherited IRAs have specific payout rules, especially after the SECURE Act eliminated the ability for nonspouse beneficiaries to “stretch” these required minimum distributions (RMDs) over their lifetimes. IRA beneficiaries often don’t understand that they cannot treat their inherited IRAs as they would their own IRAs. If they do not remove an RMD by the end of the calendar year when it is due, they will be hit with an excess accumulation penalty tax of 50 percent of the amount that should have been distributed.
While the IRS doesn’t require financial organizations to inform IRA beneficiaries how much they must distribute from their inherited accounts each year, providing that information can be a good customer service. Ultimately, it’s up to the beneficiary to take an RMD by the due date.
I have a will. Why should I name beneficiaries for my IRA?
Your clients may think they’ve covered their bases by having a will or trust, but an IRA beneficiary designation will override these written documents for purposes of disbursing the IRA assets after the IRA owner’s death. IRA plan documents typically default to the estate when no IRA beneficiaries are listed. Sometimes, as a result, the IRA assets may have to go through the probate process before being distributed to your client’s heirs. By naming beneficiaries, an IRA owner not only has more control over who inherits his IRA assets, but doing so may provide options a beneficiary would not have if inheriting through an estate or trust. It’s important to remind your clients to update their beneficiary elections after major life changes, such as a divorce or a beneficiary’s death.
Can I move my Traditional IRA assets into my new employer’s 401(k) plan?
Yes. Many 401(k) plan sponsors do allow employees to roll over their IRA assets directly into their plan. If your client is still working past age 72, it may make sense to do this if she wants to avoid RMDs while continuing employment. Be aware that only pretax, non-Roth IRA assets can be rolled over to an employer’s plan.
Can my spouse make an IRA contribution if she isn’t working right now?
Yes. If a working spouse receives enough eligible compensation to cover the IRA contribution for a nonworking spouse, the nonworking spouse can make a contribution to her IRA, provided they file a joint federal tax return. For example, a nonworking spouse whose marital partner earns $6,000 in annual eligible compensation can make a contribution of up to $6,000 (current annual limit) to her own IRA, assuming they file jointly. Or the $6,000 contribution can be split between the working and nonworking spouses’ IRAs as they choose (e.g., $3,000 to each). If the working spouse has at least $12,000 in annual eligible compensation and owns an IRA, then each spouse can make the maximum annual contribution to each of their IRAs (i.e., $6,000 to each). If one or both individuals is age 50 or older, their contribution limit is $7,000.
Does it make a difference how I move my IRA assets to my new IRA at your financial organization?
Yes. Moving IRA assets as a “transfer” means that the IRA assets go directly to the new IRA, either electronically or as a check, and are deposited only by the new IRA trustee or custodian. The transaction is not reportable to the IRS. In contrast, a “rollover” is when the IRA assets do not go directly to the receiving IRA. Instead, the IRA owner takes receipt of the assets—a “distribution”—before depositing them into the new IRA. A rollover is reportable to the IRS.
Be sure your clients are aware that they have 60 calendar days to deposit, or roll over, the assets into an IRA. If they are under age 59½ and miss this deadline, they will likely be subject to an early distribution penalty tax—unless it was a nontaxable distribution from a Roth IRA—and pay income tax on the distribution. In either case, they would no longer be eligible to roll the assets over to an IRA.
I am turning 50 later this year. Can I make a catch-up contribution now, or do I have to wait?
There is no need to wait. IRA owners are eligible to make an additional $1,000 annual contribution for the year they turn 50. They do not have to wait until the day of their birthday to make the catch-up contribution. In other words, they are eligible to make their catch-up contribution on or after January 1 of the year they turn 50, up until the deadline for filing that year’s taxes—and for the years that follow.
How can I avoid RMDs when I turn 72?
For clients who want to avoid the requirement of taking annual distributions starting at age 72, a Roth IRA may be an option for them to consider. If your client isn’t eligible to make Roth IRA contributions because his modified gross income exceeds the limits, he could make nondeductible Traditional IRA contributions and convert those after-tax assets to a Roth IRA, using a strategy that has come to be known as the “back-door” Roth IRA contribution. A Roth IRA conversion of pretax non-Roth IRA assets is a taxable event, but your client’s future qualified Roth IRA distributions would be tax-free—and without the requirement to start withdrawing from the IRA at age 72.
Can I borrow money from my IRA?
No. Unlike participation in a 401(k) or other employer-sponsored retirement plan (other than SEP or SIMPLE IRA plans), an IRA owner cannot take a loan from an IRA. However, the rollover rules allow an IRA owner to withdraw assets and return them within 60 days, possibly providing your clients with a short-term borrowing solution if necessary. They need to be aware of the rollover rules, particularly the one-per-12-month rule, which limits each taxpayer to one IRA-to-IRA rollover in a 12-month period. The rule applies to all of their IRAs in aggregate, not one per IRA (as was once the IRS interpretation).
If I decide to retire before age 59½, can I withdraw my IRA assets early without paying a penalty tax?
Yes, for some IRA assets. Roth IRA owners may withdraw Roth IRA contributions early without penalty taxes, but any earnings portion of a distribution would be subject to an early distribution penalty tax, unless the IRA owner qualifies for an exemption. IRA owners can also avoid the 10 percent penalty tax by setting up a series of substantially equal periodic payments. Depending on the type of IRA, these payments are potentially subject to ordinary income tax, similar to distributions taken after age 59½. They can be set up for Traditional, Roth, and SIMPLE IRAs, and payments must continue unchanged until the later of five years or until the IRA owner reaches age 59½.
