Can I Split My Traditional IRA Into Two Accounts?
To do so efficiently and fairly, the easiest approach is to establish separate accounts for each beneficiary before the account owner dies – this gives each beneficiary the power to stretch distributions over their individual life expectancies.
Traditional IRA contributions are tax deductible and all earnings grow tax deferred until withdrawal; then taxed as ordinary income.
1. Taxes
Traditional IRAs can help your savings grow faster by helping to keep taxes out of the picture while you build it. Your contributions qualify for tax deductions; and income taxes only become due when withdrawing funds – which could be at your ordinary income rate.
However, when an account is transferred to an heir, its value becomes taxable income in respect of the decedent and must be included as income owed in gross income calculations and may incur an early withdrawal penalty of 10% if under 59 1/2.
Avoid this problem by splitting your IRA into separate accounts for each beneficiary before required minimum distributions (RMDs) begin to hit. Another solution would be requesting a Private Letter Ruling from the IRS; these rulings act like mini Tax Court cases in which you argue your case and then wait to see their decision (which they usually make public shortly thereafter without redacting personal identifying information). An estate planning attorney can assist in reaching this goal.
2. Investments
In contrast to employer-managed retirement accounts such as 401(k), Individual Retirement Accounts (IRAs) offer you more freedom in choosing where and when you invest your money. But this flexibility comes at the cost of greater complexity: for instance, some IRA rules prohibit investments such as collectibles such as art, rugs and antiques; certain bullion (except gold); and real estate as investments within an IRA.
Withdrawals from an Individual Retirement Account are subject to tax, but taxes won’t become payable until age 73 when required minimum distributions (RMDs) must begin being taken from it. Assuming you expect your tax bracket in retirement will be lower than it was during working life, traditional IRAs make more sense than Roth IRAs for potential savings in tax brackets that might lower than that.
Your IRA investments can be managed either on your own or with professional assistance. Online discount brokers provide access to an extensive array of investments while many robo-advisors provide passive asset management at lower fees than traditional asset managers charge. But before investing your money anywhere, be sure that there will be enough funds in your savings account or retirement fund for emergency expenses as well as retirement contributions. Create a spending plan first – making sure you will have enough cash reserves when needed!
3. Withdrawals
Traditional or Roth IRAs provide powerful tax benefits, enabling you to build wealth before incurring income taxes upon withdrawal of the funds. However, when withdrawing them for use elsewhere income tax will apply accordingly.
Typically, when withdrawing money from a traditional IRA before age 59 1/2, an early withdrawal penalty of 10% must be paid in addition to ordinary income taxes. There are exceptions; including using this money towards purchasing your first home or paying unreimbursed medical expenses in excess of 7.5% of adjusted gross income.
Making smart withdrawal decisions when withdrawing from an IRA can ensure that you extract maximum value from it and reduce future headaches. If you own an IRA and switch jobs, consider rolling it over into their retirement plan instead; that way it won’t count towards your contribution limit for that year.
4. Rollovers
Rollover your 401(k) into an IRA to continue growing your retirement assets tax-deferred and have access to more investment options than might be available through your employer. Plus, having all your retirement investments centralized can make managing it simpler as the required minimum distributions (RMD) become due.
Before rolling over your account, there are a few key considerations you must keep in mind. Most importantly, all distributions must be deposited in their new accounts within 60 days in order to avoid paying taxes and penalties from the IRS – otherwise your transfer will be considered a taxable distribution with an associated 10% early withdrawal penalty assessed against it.
As part of your rollover decision-making process, it’s also crucial that you recognize whether it will be direct or indirect and keep in mind that there can only ever be one IRA rollover each year. Also be mindful of other key details like investment options and fees related to Self-Directed IRA rules in order to make the right choice for yourself.
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