IRA and Related Information
Internal Revenue Code provides for a number of tax-advantaged vehicles that can significantly enhance your return on investments. You’ll find valuable information on various publications available from the IRS and other organizations related to IRA’s, 401(k)’s, 529’s and other plans. We have provided an overview of the various plans below:
There are a number of different types of IRAs, which may be either employer-provided or self-provided plans. The types include:
- Roth IRA
- Contributions are made with after-tax funds or assets; all transactions
within the IRA have no tax impact; and withdrawals are usually tax-free.
Named after Senator William Roth. - Traditional IRA
- Contributions are often tax-deductible (often simplified as “money is
deposited before tax” or “contributions are made with pre-tax assets”); all
transactions and earnings within the IRA have no tax impact, and withdrawals
at retirement are almost always taxed as income. - SEP IRA
- A provision that allows an employer (typically a small business or
self-employed individual) to make retirement plan contributions into a
Traditional IRA established in the employee’s name, instead of to a pension
fund account in the company’s name. - SIMPLE IRA
- A simplified employee pension plan that allows both employer and employee
contributions, similar to a 401(k) plan, but with lower contribution limits and
simpler (and thus less costly) administration. Although it is termed an IRA, it
is treated separately. - Self-Directed IRA
- A Self-Directed IRAthat permits the account holder to make investments on behalf of the retirement plan.
There are two other subtypes of IRA, named Rollover IRA and Conduit IRA, that are obsolete under current tax law (their functions have been absorbed into the Traditional IRA) but this tax law is set to expire unless extended. What was formerly known as an Educational IRA is now called a Coverdell Education Savings Account.
Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many of the restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds could be rolled into were significantly relaxed. Additional acts have further relaxed similar restrictions. Essentially most retirement plans can be rolled into an IRA after meeting certain criteria, and most retirement plans can accept funds from an IRA. An example of an exception is a non-governmental 457 plan which cannot be rolled into anything but another non-governmental 457 plan.
The tax treatments of the above types of IRAs except for Roth IRAs are substantially similar, particularly for rules regarding distributions. SEP IRAs and SIMPLE IRAs also have additional rules similar to those for qualified plans governing how contributions can and must be made and what employees are qualified to participate.
529 College Savings Plan
A 529 plan is a tax-advantaged investment vehicle designed to encourage saving for the future higher education expenses of a designated beneficiary. It is named after section 529 of the IRS Code. The detailed behavior of 529 plans is determined by state legislation, and while most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as matching grant and scholarship opportunities, protection from creditors and exemption from state financial aid calculations, for investors who invest in 529 plans within their state of residence.
There are two types of 529 plans: Prepaid and Savings:
Prepaid plans allow one to purchase tuition credits, at today’s rates, to be used in the future. Therefore, performance is based upon tuition inflation.
Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds. Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college-age. They also offer risk-based asset allocation options where the underlying investments maintain the same equity-to-fixed-income ratio regardless of the age of the beneficiary. Many savings plans also offer a stable value or guaranteed option designed to protect an investor’s principal while providing for some investment growth, while others offer investments in certificates of deposit.
Prepaid plans may be administered by states or higher education institutions. Savings plans may only be administered by states. Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company.
One of the disadvantages in 529 College Savings Plans is that they continue to go through a lot of changes, and most of them are related to state issues and therefore can be very complex and inconsistent between individual states. Fortunately, California’s 529 plan is one of the easiest and most generous available in the US. Otherwise, to maximize your tax deductions and credits we recommend seeking professional advice.
For more information, go to the College Savings Plan Network’s web site at www.collegesavings.org and Joseph Hurley’s directory, www.savingforcollege.com.
The Federal and State governments literally print tens of millions of tax forms each year. Many of use the Internet or tax preparation software to get the exact forms we need and even detailed guidelines on how to complete and file the forms. In case you haven’t had a chance to go get these forms yourself, go to www.ftb.ca.gov for California tax forms and www.irs.gov for the Federal forms.
Now, it’s no fun reading the United States code regarding the regulation of taxes and IRAs, but we understand there are those who are interested in the law and facts about IRA’s 401(k)s and other retirement or savings plans.
For questions regarding IRAs and the investment into real property go to: www.law.cornell.edu/uscode/uscode26/usc_sec_26_00000408—-000-.html
It’s pretty dry stuff, but it establishes the existence if IRAs and mentions (almost by default) the ability to invest in real property.
There are a few things you can not invest in, even if your IRA is self-directed. Collectibles are a good example of this restriction. To read about the other examples go to
www.irs.gov/publications/p590/ch01.html#d0e7517.
If you want to know the latest limits on the contributions you can make to IRA or 401(k) go to this link if you want to get the full details of your maximum contributions.
www.irs.gov/publications/p590/ch01.html#d0e1516.
Remember, the great thing about your IRA is there is no limit in how much your account can grow. Even if your property triples in value in one year it does not affect your own contribution limits.
If you are seriously into the pain of reading the technical aspect of EVERYTHING retirement account, there is a considerable information available at the IRS’s site. The establishment of IRAs and law regarding their operation and fund maintenance and distribution is just one of the myriad of subjects covered in the IRS’s own FAQ section at:
www.irs.gov/retirement/index.html.
FTC Consumer Alert! FYI, the IRS does not approve IRA investments.
Investors in retirement accounts should keep a watchful eye out for ads or solicitations that claim that IRA investments are “IRS approved” or “IRA approved”.
According to the FTC and the SEC, some investors are getting misleading sales messages that suggest the IRS “actually approves of certain plans”.
The IRS does issue letters to IRA sponsors, trustees and custodians certifying that they are complying with administrative standards that allow contributions to be deductible. However they do not, review or approve investments, endorse any investments, or advise people as to how to invest.
Complete Information is available at: www.ftc.gov/bcp/conline/pubs/alerts/iraalrt.htm. or www.irs.gov/pub/irs-pdf/p3125.pdf
