Limits of protection against bankruptcy, inheritance and more

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IRAs exist since 1974. And yet, after nearly 50 years, there is much that the 47.9 million households who use IRAs to save for retirement are always wrong about these retirement accounts.

Here’s a look at the often overlooked facts about IRAs:

How much can I contribute and is it tax deductible?

Experts say account owners often forget how much they can contribute to an IRA. To be fair, the IRS occasionally changes the amount that one can contribute to an IRA. For 2021, for example, the total contributions you make each year to all your traditional IRAs and Roth IRAs cannot exceed $ 6,000 ($ 7,000 if you are 50 or older), or if less, your taxable compensation for the year.

Experts Also Say Account Owners Also Forget if their contribution is tax deductible. Yes, the deduction may be limited if you or your spouse are covered by a workplace pension plan and your income exceeds a certain threshold.

Traditional IRA: Known as the Traditional Individual Retirement Account, it allows people to direct a portion of their pre-tax income to investments that can grow tax-deferred.

“Often, account owners don’t realize they can contribute to an IRA even though they have a 401 (k) based on their income,” explains Phillis sax pilvinis, the founder of PSP & Associates Inc. Retirement Wealth Strategists.

How best to avoid misconceptions about the annual IRA contribution limit? Review these details on the IRS website.

What can I invest in?

Sax Pilvinis also notes that account owners are not always aware that an IRA is a tax status and not an investment vehicle. But even though it is not an investment vehicle, account holders can invest in almost anything except life insurance or collectibles such as works of art. art, antiques, stamps, comics, most coins, alcoholic beverages and some other tangible personal property.

If in doubt, visit the IRS website.

Who inherits my IRA?

You can't just state who inherits your IRA in your will.  You must specify the beneficiaries to the company holding the account.  In addition, only surviving spouses have 60 days to renew them.  Everyone must make a direct transfer.

You can’t just state who inherits your IRA in your will. You must specify the beneficiaries to the company holding the account. In addition, only surviving spouses have 60 days to renew them. Everyone must make a direct transfer.

Many account owners mistakenly believe that their heirs will inherit their IRA by stating these wishes in their will. But this is not how IRAs are transferred when a person dies. Instead, the IRA, along with 401 (k) account owners, must designate a beneficiary as well as a possible beneficiary, says Jeannette Bajalia, the president of Petros Financial Group.

“The beneficiary form is, in essence, the will of the IRA,” says Joe DiSalvo, chartered financial consultant, chairman of Quest Capital & Risk Management and co-author of “Income For Life: A Retiree’s Guide to Creating Income From Their Savings“The average person and many brokers don’t understand this. Most people cannot get their hands on their beneficiary designation forms, and many are often executed incorrectly. “

What to do? Check the primary and secondary beneficiary designation on all your retirement accounts and insurance policies and update them as needed.

A tax time bomb waiting to arrive

The time was that those who inherited an IRA could distribute the assets of those accounts during their lifetime. No more. The SECURE Act put the kibosh on what the advisers called the “stretch IRA. “

Now, those who inherit an IRA just have 10 years to distribute all the assets of the account. And because of this, says Bajalia, “IRAs are now tax time bombs for their beneficiaries due to the loss of the extended IRA.”

This is because the distributions are taxable as ordinary income and could push the recipient’s income into a higher tax bracket.

Bajalia’s advice: “Be aware of the tax status of your beneficiary. It may be a good idea to spend all of your IRAs over the course of your life and not leave the tax burden to children in the highest tax brackets.

Speaking of tax bombs, IRA owners also forget that the assets in these accounts have no cost base. “One hundred percent of the value is taxed as ordinary income,” Bajalia said. “No losses and no gains.”

In view of this, one should expect that the gross value of one’s IRA account is not the value of after ordinary income tax.

No 60-day deferral

Many IRA Recipients Without A Spouse Suffer From The Misconception They May Have 60-Day Rollovers of Inherited IRAs.

“In reality, beneficiaries other than spouses can only make direct transfers, so called ‘trustee-to-trustee transfers'”, explains Ian berger, an IRA analyst with Ed Slott & Co.

If an inherited IRA is paid to a non-spouse, the entire IRA will be taxable for the beneficiary, he notes. “This makes it imperative for advisors to ensure that a client’s IRA custody agreement allows a non-joint beneficiary to move assets via a direct transfer, ”he explains. “Otherwise, a custodian could take the IRA’s legacy assets hostage.”

Complete protection against creditors?

Another misconception is that IRAs have full creditor protection against legal judgments against the owner of the IRA, Berger says. “Since IRAs are not ERISA plans (Employees Retirement Income Security Act), they or they do not receive armored protection that ERISA plans provide, ”he said.

IRAs are protected from bankruptcy creditors up to a certain amount ($ 1,362,800 in 2021), and this dollar amount does not include renewals of the company’s plans, he notes.

“This equates to a complete bankruptcy shield for most IRA owners,” says Berger. “However, protection against non-bankruptcy judgments depends on state law. Some states provide full protection, but creditors’ protection in other states is weaker.”

► Retirement quiz: Can you tell the difference between an IRA and a Roth IRA?

This article originally appeared on USA TODAY: Retirement: 5 things people are wrong about IRAs


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