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Popular Myths about Retirement Accounts

Discover the real facts concerning retirement accounts and retiree investing – to include distributions, beneficiaries, and rollovers.

Early Distribution

You are not allowed to distribute money from your 401(k) account until your retirement age. The general rule about this is any money you get from your 401(k) account prior to becoming 59 ½ years of age is considered early withdrawal. This delineates that you will need to recompense penalty aside from the income tax on the money. Several plans come with exceptions to this policy and will allow you to procure money early – penalty free – in some instances. For instance, you need to compensate medical expenditures. There are retirement accounts that will even permit you to have access to money from your plan penalty-free. Assess your account documents to learn about early withdrawals.

Remember, however, that you will not get free rides when dealing with the IRS. While you may prevent paying the penalty, you can’t escape reimbursing income tax on the distributed money.

Penalties

If you get money from your traditional IRA prior to becoming 59 ½ years of age, you will pay penalty at all times. The truth is there are a few ways to receive money from your traditional IRA exclusive of penalty. You can distribute the funds in installments over your lifetime whatever your age is. You may also withdraw the money to cover your college expenses or assist you in purchasing your first home.

Keep in mind, however, that even if you are permitted to get your money from your traditional IRA without incurring a penalty, you will still shoulder the income tax on the money.

Cashing Out

When you distribute money from your traditional IRA, you should get cash. You will not be allowed to procure corporate bonds, shares of stock, checkbook IRA, or certificates of deposit. You are authorized to acquire “property” like corporate bonds or stock shares out of your IRA rather than selling them initially and getting the cash. This policy is beneficial if you desire to keep specific securities.

When you become 70 ½ years of age, you should take a particular amount out of your traditional IRA every year — nothing more, nothing less. The required amount that you should take after becoming 70 ½ years of age is known as RMD or required minimum distribution.

Spouse as Beneficiary

It’s a good idea to put your “estate” as your beneficiary for your 401(k) or other kinds of retirement accounts. In general though, it is not a great idea to have your estate as a beneficiary. There are a number of setbacks in this practice, and even several disadvantages. When you name your estate as your beneficiary, you are normally left with limited options to your heirs when they try to withdraw the money from your account after your demise. For instance, your spouse may not be allowed to carry out a roll over into his or her personal IRA.

You can’t modify or change your beneficiary after you become 70 ½ years of age. In reality, you can change your beneficiary at all times. You have all the right to name who will receive your money after you die.

70 ½ Years of Age

Each year after you become 70 ½ years of age, you are necessitated to get money from your 401(k). If you are still working after becoming 70 ½ years of age, you will not be obliged to get funds from your 401(k) until you reach your retirement, unless you are a business owner.

If you are 70 ½ years of age, you are demanded to get money out of each of your IRA. If you are maintaining a number of IRAs, a special policy permits you to the entire amount that you are necessitated to procure from every IRA and then acquire the grand total from a single account.

Children as Beneficiaries

If your 401(k) beneficiaries are your children, they have the option to rollover your plan into their own Individual Retirement Account when you die. The truth behind this is that the only beneficiary who is permitted to rollover your retirement account to their own IRA is your spouse.

You children as beneficiaries should take all the funds out of your IRA after you die immediately and compensate taxes on it. With cautious planning, once you completed your IRA beneficiary form, in the year after your death, your beneficiaries must be able to distribute the money over their own life expectancies.

Rollover

No withdrawals are obliged from a Roth IRA. Even though you are not demanded to carry out distributions from your own Roth plan over your life expectancy, all of your beneficiaries except your spouse should start withdrawing money after you die.

If you would like to rollover your traditional IRA to a Roth IRA and then distribute a portion or all of the converted funds in the following years, such money may be subject to income tax. Remember that when investing after retirement, the converted funds are not subject to regular income tax after the conversion year. You have paid the tax already. However, you must be ready to pay for early withdrawal penalty if you get the funds too soon after the conversion and if you are not yet 59 ½ years of age.

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It’s Not Too Late! - You can make tax deductible 2017 IRA contributions until April 17, 2018.   Learn How