According to data from the Investment Company Institute, 37% of US households own an Individual Retirement Arrangement (IRA), and more than 60% of households have a workplace retirement plan or IRA. Millions of Americans utilize accounts such as an IRA to save for retirement, so it is crucial that the rules dictating distributions and rollovers are understood, especially since the rules are updated every year. The team at Crash Proof Retirement® heavily emphasizes that IRAs are arrangements, and not individual accounts, due to the frequency of regulatory changes made to this type of investment by the IRS. As such, we have some information about retirement plan rollovers and pending legislation that could rearrange the way you save for retirement.
What is an IRA or Retirement Plan Rollover?
If you take money out of a traditional IRA or 401(k) before you reach age 59½, it will be taxed as regular income; you will also be assessed a 10% early withdrawal penalty. You can avoid IRS tax penalties by performing a rollover.
If you take a distribution from an IRA or 401(k) and deposit that amount into another qualified retirement plan or IRA within 60 days of withdrawal, it will not be included as income for tax purposes, and the 10% penalty will be waived. You can rollover all or part of the money in a retirement account. If you choose to use this method, taxes will be withheld; therefore, you will need to ensure that you have other funds available to cover the full amount of the rollover within 60 days. You can also have your financial institution transfer this money directly to avoid having any taxes withheld.
IRA Rollover Rules
As of January 1st, 2015, IRA owners can only make one rollover to another IRA in any 12-month period. Therefore, even if you own more than one IRA or retirement account, you will only be able to initiate one rollover per year. This rule does not apply to Roth IRA conversions, trustee-to-trustee transfers to another IRA, or any transfer made between similar IRA plans. Violating these rules will require you to include the rollover amount in your gross income when it comes time to pay your taxes and may subject you to a 10% early withdrawal penalty.
Required Minimum Distributions (RMDs)
When you reach age 72, you will be required to withdraw a certain amount from your IRAs each year, known as required minimum distributions. Otherwise, you will be subject to a 50% penalty of the required RMD amount. RMDs can be calculated using the life expectancy tables published by the IRS, or by using an RMD calculator. It is imperative that owners of traditional IRA plans stay up-to-date with rule changes made by the IRS, as RMDs cannot be rolled over into other retirement accounts. Additionally, the IRS made several changes to IRA rules for beneficiaries in the SECURE Act, effective as of January 1, 2020, which owners need to know about if they plan to pass on a legacy using their IRA nest egg.
RISE & SHINE Act
The House of Representatives passed the SECURE Act 2.0 in March 2022, which is a piece of legislation containing numerous reforms intended to improve Americans’ retirement readiness. Congress hopes to expand on the progress made in the original SECURE Act by increasing IRA and 401(k) catch-up contributions for specific age groups and gradually raising the age that retirees would be required to take RMDs.
Many experts consider the RISE & SHINE Act to be the Senate’s version of the SECURE Act 2.0. In tandem with the EARN Act, the RISE & SHINE Act would increase the RMD age, provide cost-of-living adjustments for catch-up contributions, reduce the excess accumulation penalty for missed RMDs, and more. While the SECURE Act 2.0 and the RISE & SHINE Act are a long way from being codified into law, both bills enjoy broad bipartisan support and are likely to be passed when the Senate brings them up for a vote.
If and when these bills become law, it will change the landscape of retirement saving in the United States and retirees must be aware of these changes to take full advantage of their saving opportunities. If you are currently contributing to any type of IRA or 401(k) plan, we would encourage you to stay educated about these bills and consider the effect they could have on your retirement plans. You can stay up-to-date on any pending legislation that could impact your retirement strategy by checking out the Crash Proof Retirement® blog, or by scheduling to meet with one of the licensed educators at Crash Proof Retirement®.
If you are currently searching for a financial advisor in Montgomery County, PA or anywhere else in the country, now is the time to speak with the licensed retirement phase experts at Crash Proof Retirement®. The Crash Proof Retirement® team can help you develop a sound IRA strategy for all phases of your life, including leaving a legacy for your family. Furthermore, by meeting with our team of professionals, they can put together a proprietary Crash Proof Retirement® System designed exclusively with safe financial vehicles that are guaranteed to prevent you from losing your principal investment during a stock market crash. Call 1-800-722-9728 or fill out the form on our contact page to get in touch with our team and schedule your complimentary financial checkup today.