By Sarah Brenner, JD
Thanksgiving is only a few days away. This is a time when we gather together and express our gratitude for all the good things in our lives. When it comes to our Retirement accounts, we too often complain about the negatives, such as the restrictions that are not logical and the complicated and confusing rules. To celebrate Thanksgiving, let’s change it up and take a few moments to give thanks for the IRA rules that work well and help us save for our families’ futures.
We are thankful for these five IRA rules:
1. The Roth IRA Distribution Rules: The Roth IRA arrived on the scene in 1998 and brought with it a whole new way of Retirement savings. The Roth IRA distributions rules allow tax-free distributions of earnings as long as the distribution is qualified distribution. As an extra bonus for savers, the ordering rules, which dictate how funds are distributed from a Roth IRA, are very favorable to the Roth IRA owner, allowing access to contributions without tax or penalty before any earning are touched. For the past 20 years, Roth IRAs have been hugely beneficial for those saving for Retirement and for that we say thanks!
2. The Stretch IRA: The stretch IRA is not a type of IRA. Rather, it is a strategy that IRA owners can use to continue tax advantaged growth for generations. A stretch can be achieved by naming a living breathing person on the IRA beneficiary form, which allows the beneficiary to take required distributions over their single life expectancy. Special rules apply for trusts. The stretch IRA is so powerful that its recently been on Congress’s radar for extinction, but so far attempts to kill it have gone nowhere. Right now, the stretch IRA still exists, and millions of IRA owners and their beneficiaries are thankful for that!
3. Spousal Benefits: Being married has its benefits under that tax code. When it comes to IRAs, spouses get a bunch of benefits. Non-working spouses can make spousal contributions to their IRAs to build Retirement savings. Spouse beneficiaries have options not available to non-spouse beneficiaries such as the ability to do a spousal rollover and continue tax-advantages savings with the IRA. For these benefits, many stay at home parents, widows, and widowers are thankful.
4. Self-Certification: Rollovers have a deadline. A distribution must be rolled over within 60 days of its receipt by the IRA owner. Missing the deadline means you have a problem. In the past, IRA owners’ options for fixing this mistake were time consuming and expensive. The private letter ruling process was often the only option. All of this changed in recent years with the IRS announcing a new self-certification process for late rollovers. The self-certification process can provide relief to many who miss the rollover deadline and it is immediate and free. Thank you IRS!
5. Exceptions to the Early Distribution Penalty: Retirement accounts are supposed to be for saving for Retirement. That is why there is a 10% early distribution penalty that applies to distributions taken before age 59 ½. However, life doesn’t always go as planned and Congress has recognized that fact. That is why there is now a list of exceptions to the penalty allowing younger savers access to their Retirement funds for such reasons as higher education, disability, or a first home purchase. For these exceptions, many Retirement account owners who have faced unexpected bills or emergencies are grateful.