IRA FAQ

What is an IRA?

A Traditional IRA is a tax-deferred retirement account which allows an individual to set aside a certain amount per year with earning tax-deferred until mandatory distributions are required at age 70 ½ and later. Only those who participate in a pension plan at work or who do participate and meet certain income guidelines can make a deductible contributions to a Traditional IRA. All others can make contribuitons to a Traditional IRA on a non=deductible basis. The non-deductable type of contribution does not qualify as a deduction against income earned that year, but the interest accumulates tax deferred until the funds are withdrawn.

A Roth IRA is a tax-free retirement account when established for at least five years and after obtaining age 59 ½. Contributions are not tax-deductible and are based on certain income guidelines. Mandatory distributions at age 70 ½ do not apply to Roth IRAs.

What types of IRAs are available? 

First South Bank offers a wide range of IRAs, including Traditional, Roth, SEP, and Rollover IRAs.

How do I know if I am eligible to make a contribution?

You can contribute to a Traditional IRA if you have earned income and are under the age of 70 ½. If you are not employed, but have a spouse who is, your spouse may be able to make a contribution on your behalf.

When may I withdraw funds from my IRA? 

In general, withdrawing your IRA prior to age 59 ½ means you’ll have to pay a 10% early withdrawal penalty. You may avoid the penalty if you’re withdrawing because of:

• First time home purchase ($10,000 lifetime limit)
• Qualified education expenses
• Substantially Equal Periodic Payments – 72(t)
• To pay for health insurance premiums if unemployed more than 12 consecutive weeks
• Medical Expenses in excess of 7.5% of your AGI (Adjusted Gross Income)
• Death
• IRS Levy
• Disability

What is an IRA Rollover?

A rollover requires a distribution from an IRA or qualified plan, which is then rolled over into an IRA account within a 60-day period to complete the rollover transaction. While the rules for rollovers and transfers differ, they accomplish similar objectives. Both rollovers and transfers facilitate the tax-free movement of IRA monies from one trustee or custodian to another.

Is there a maximum IRA transfer or rollover?

In most cases there is no limit on the amount you may transfer. One rollover is allowed in a 365- day period. You may transfer or roll over your IRA regardless of your age. However, if you are 70 ½ or older, you must receive a minimum required distribution from your IRA each year. This should be taken into account in planning your rollover.

Can I deduct losses in my IRA accounts on my income tax return?

No, neither IRA losses nor IRA gains are taken into account on your tax return.

What is a mandatory distribution? 

In a Traditional IRA, you are required by law to begin taking distributions from your IRA in the year you reach age 70 ½. The amount of the distribution is based on your age and the value of your account. Internal Revenue Service Publication 590 provides the information to calculate the minimum distribution. Required minimum distributions must start no later than April 1 of the year following the year in which you attain age 70 ½. Failure to take the required minimum distribution results in an IRS penalty tax of 50% of the amount that should have been distributed.

What is the tax consequence of taking a distribution?

Distributions from a Traditional IRA are treated as income to you. You will receive an IRS form 1099R each January summarizing the amount distributed and the taxes withheld, if any. In a Roth IRA, if you take a distribution after the account has been open five years and you have reached the age of 59 ½, the distribution will be tax free.

What are the tax consequences of an “early” withdrawal?

An “early” withdrawal is generally one taken before age 59 ½ in a Traditional IRA or within the first five years of a Roth IRA. In addition to the amount added to your income, the IRS may assess an additional 10% penalty. You should consult with your tax advisor regarding the tax consequences.

Are IRA accounts subject to any restrictions? 

Yes. The IRS does prohibit certain transactions on Traditional IRAs. Examples include: borrowing money from your IRA, contributing over your annual limit, rolling funds over from another IRA after the sixty (60) days have expired, or exceeding the one rollover per year rule, or forgetting to take an annual distribution after you have reached 70 ½.

What happens to my IRA in the event of my death?

Your named beneficiary(ies) will receive the entire proceeds of the IRA. Your beneficiary(ies) will not be subject to the 10% premature-distribution penalty tax. Distributions to your beneficiary(ies) will be made in accordance with the required minimum distribution rules and your IRA agreement.

Is there a contribution deadline for funding an IRA?

IRAs for a taxable year can be opened and funded any time between the first day of a tax year and the date a tax return is due for that year, excluding extensions. For most taxpayers, this due date is April 15 of the following year.

This site is provided for your information and does not constitute tax advice. Please consult with your accountant or tax advisor for specific guidance.