Individual Retirement Account
Encyclopedia
An individual retirement arrangement (IRA) is the blanket term for a form of retirement plan that provides tax advantage
s for retirement
savings in the United States. The term encompasses an individual retirement account — a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries — and an individual retirement annuity
, by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company.
(ERISA). Taxpayers could contribute up to $1,500 a year and reduce their taxable income by the amount of their contributions. Initially, ERISA restricted IRAs to workers who were not covered by a qualified employment-based retirement plan. In 1981, the Economic Recovery Tax Act (ERTA) allowed all taxpayers under the age of 70½ to contribute to an IRA, regardless of their coverage under a qualified plan. It also raised the maximum annual contribution to $2,000 and allowed participants to contribute $250 on behalf of a nonworking spouse. The Tax Reform Act of 1986 phased out the deduction for IRA contributions among higher-earning workers who are covered by an employment-based retirement plan. However, those earning above the amount that allowed deductible contributions could still make nondeductible contributions to their IRA. The maximum amount allowed as an IRA contribution was $1500 from 1975 to 1981, $2000 from 1982 to 2001, $3000 from 2002 to 2004, $4000 from 2004 to 2007, and $5000 from 2008 to 2010. Beginning in 2002, those over 50 could make an additional contribution called a "Catch-up Contribution."
There are two other subtypes of IRA, named Rollover IRA and Conduit IRA, that are viewed as obsolete under current tax law (their functions have been subsumed by the Traditional IRA) by some; but this tax law is set to expire unless extended. However, some individuals still maintain these arrangements in order to keep track of the source of these assets. One key reason is that some qualified plans will accept rollovers from IRAs only if they are conduit/rollover IRAs.
What was formerly known as an Educational IRA is now called a Coverdell Education Savings Account
.
Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA), many of the restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds could be rolled into were significantly relaxed. Additional acts have further relaxed similar restrictions. Essentially most retirement plans can be rolled into an IRA after meeting certain criteria, and most retirement plans can accept funds from an IRA. An example of an exception is a non-governmental 457 plan
which cannot be rolled into anything but another non-governmental 457 plan.
The tax treatment of the above types of IRAs except for Roth IRAs are substantially similar, particularly for rules regarding distributions. SEP IRAs and SIMPLE IRAs also have additional rules similar to those for qualified plans governing how contributions can and must be made and what employees are qualified to participate.
, and some non security financial instruments. Some assets cannot be held in an IRA such as collectibles (e.g., art, baseball cards, and rare coins) and life insurance
. Some assets are allowed, subject to certain restrictions by custodians themselves. For example an IRA cannot own real estate if the IRA owner receives or provides any immediate gain from/to this real estate investment. Examples of such gain would be the use of the property as the owner's personal residence or the benefit paid to an owner as property manager in the form of personal compensation for this service. The IRS specifically states that custodians may impose their own policies above the rules imposed by the IRS. It should also be noted that custodians cannot provide advice.
Many IRA custodians limit available investments to traditional brokerage accounts such as stocks, bonds, and mutual funds, and do not permit real estate
in an IRA unless the real estate is held indirectly via a security such as a real estate investment trust
(REIT). Self-directed IRA custodians/administrators can allow real estate and other non-traditional assets. For example, some options brokers allow their IRA accounts to hold stock options, which are derivatives, not securities. They typically charge fees based on asset values. There are certain special restrictions on real estate held in an IRA (the IRA owner cannot benefit from the property in any way, i.e. he or she cannot use it). Self Directed IRA's allowing non security investments are more complicated.
While certain types of investments are prohibited in an IRA, real estate is not one of them. As a result, real estate owned by an IRA can generate rental income and gain on a sale which escapes immediate taxation. However, the IRA does not get (or, need) the related deductions (e.g., depreciation, mortgage interest,property taxes, etc.).
An IRA may borrow money but any such loan must not be personally guaranteed by the owner of the IRA, and also the loan must be secured solely by assets in the IRA (in other words, a non-recourse loan). Also, the owner of the IRA may not pledge the IRA as security against a debt.
Even if a particular investment is permitted to be held in an IRA, care should be taken to optimize the location of the investment in a taxable account, a traditional IRA or a Roth IRA. For example, interest on municipal bonds is generally not taxable; it is thus generally not optimal to hold municipal bonds in an IRA.
is not taken the penalty is 50% of the amount that should have been taken. The amount that must be taken is calculated based on a factor taken from the appropriate IRS table and is based on the life expectancy of the owner and possibly his or her spouse as beneficiary if applicable. At the death of the owner, distributions must continue and if there is a designated beneficiary, distributions can be based on the life expectancy of the beneficiary.
There are several exceptions to the rule that penalties apply to distributions before age 59½.
Each exception has detailed rules that must be followed to be exempt from penalties. The exceptions include:
There are a number of other important details that govern different situations. For Roth IRAs with only contributed funds the basis
can be withdrawn before age 59½ without penalty (or tax) on a first in first out
basis, and a penalty would apply only on any growth (the taxable amount) that was taken out before 59½ where an exception didn't apply. Amounts converted from a traditional to a Roth IRA must stay in the account for a minimum of 5 years to avoid having a penalty on withdrawal of basis unless one of the above exceptions applies.
If the contribution to the IRA was nondeductible or the IRA owner chose not to claim a deduction for the contribution, distributions of those nondeductible amounts are tax and penalty free.
can exempt his or her IRA, up to the amount necessary for retirement, from the bankruptcy estate. The Court indicated that because rights to withdrawals are based on age, IRAs should receive the same protection as other retirement plans. Thirty-four states already had laws effectively allowing an individual to exempt an IRA in bankruptcy, but the Supreme Court decision allows federal protection for IRAs.
The Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005 expanded the protection for IRAs. Certain IRAs (rollovers from SEP or Simple IRAs, ROTH IRAs, individual IRAs) are exempt up to at least $1,000,000 (adjusted periodically for inflation) without having to show necessity for retirement. The law provides that "such amount may be increased if the interests of justice so require." Other IRAs (rollovers from most employer sponsored retirement plans (401(k)s, etc.) and non-rollover SEP and SIMPLE IRAs) are entirely exempt.
The 2005 BAPCPA also increased the Federal Deposit Insurance Corporation
insurance limit for IRA deposits at banks.
If an IRA engages in a "prohibited transaction," the assets in the IRA will no longer qualify for bankruptcy protection, according to one Federal Circuit Court of Appeals. See Willis v. Menotte, 11th Circuit Court of Appeals, 2011.
According to one commentator, some minor planning can turn the 2-month period mentioned in the preceding paragraph into an indefinite loan.
Income from debt-financed property in an IRA may generate unrelated business taxable income in the IRA.
The rules regarding IRA rollovers and transfers allow the IRA owner to perform an "indirect rollover" to another IRA. An indirect rollover can be used to temporarily "borrow" money from the IRA, once in a twelve month period. The money must be placed in an IRA arrangement within 60 days, or the transaction will be deemed an early withdrawal (subject to the appropriate withdrawal taxes and penalties) and may not be replaced.
Internal Revenue Service
for the IRS ROBS Rollovers as Business Start-Ups
Compliance Project.
ROBS plans, while not considered an abusive tax avoidance transaction, have been considered questionable because they may solely benefit one individual – the individual who rolls over his or her existing retirement 401(k) withdrawal funds to the ROBS plan in a tax-free transaction. The ROBS plan then uses the rollover assets to purchase the stock of the new business. A C corporation
must be set up in order to roll the 401(k) withdrawal.
still occurs within these tax-sheltered
investment arrangements. For example, foreign dividends may be taxed at their point of origin, and the IRS does not recognize this tax as a creditable deduction. There is some controversy over whether this violates tax treaties, such as the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital.
Tax advantage
Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free...
s for retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
savings in the United States. The term encompasses an individual retirement account — a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries — and an individual retirement annuity
Annuity (US financial products)
In the United States an annuity contract is created when an insured party, usually an individual, pays a life insurance company a single premium that will later be distributed back to the insured party over time...
, by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company.
Types
Individual retirement arrangements were introduced in 1974 with the enactment of the Employee Retirement Income Security ActEmployee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
(ERISA). Taxpayers could contribute up to $1,500 a year and reduce their taxable income by the amount of their contributions. Initially, ERISA restricted IRAs to workers who were not covered by a qualified employment-based retirement plan. In 1981, the Economic Recovery Tax Act (ERTA) allowed all taxpayers under the age of 70½ to contribute to an IRA, regardless of their coverage under a qualified plan. It also raised the maximum annual contribution to $2,000 and allowed participants to contribute $250 on behalf of a nonworking spouse. The Tax Reform Act of 1986 phased out the deduction for IRA contributions among higher-earning workers who are covered by an employment-based retirement plan. However, those earning above the amount that allowed deductible contributions could still make nondeductible contributions to their IRA. The maximum amount allowed as an IRA contribution was $1500 from 1975 to 1981, $2000 from 1982 to 2001, $3000 from 2002 to 2004, $4000 from 2004 to 2007, and $5000 from 2008 to 2010. Beginning in 2002, those over 50 could make an additional contribution called a "Catch-up Contribution."
- Roth IRARoth IRAA Roth IRA is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The tax law of the United States allows a tax reduction on a limited amount of saving for retirement. The Roth IRA is named for its chief legislative sponsor, Senator...
- contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. Named for Senator William V. Roth, Jr.William V. Roth, Jr.William Victor "Bill" Roth, Jr. was an American lawyer and politician from Wilmington in New Castle County, Delaware. He was a veteran of World War II and a member of the Republican Party, who served as U.S. Representative and U.S...
. The Roth IRA was introduced as part of the Taxpayer Relief Act of 1997. - Traditional IRATraditional IRAEstablished by the Tax Reform Act of 1986, . A Traditional IRA is an individual retirement account in the United States...
- contributions are often tax-deductible (often simplified as "money is deposited before tax" or "contributions are made with pre-tax assets"), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted). Depending upon the nature of the contribution, a traditional IRA may be referred to as a "deductible IRA" or a "non-deductible IRA." - SEP IRASEP IRAA Simplified Employee Pension Individual Retirement Arrangement is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for the business owners and their employees. There are no significant administration...
- a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee's name, instead of to a pension fund in the company's name. - SIMPLE IRASIMPLE IRAA SIMPLE IRA, or "Savings Incentive Match Plan for Employees Individual Retirement Account", is a type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money and invest it to grow for later use. Specifically, it is a type of Individual...
- a Savings Incentive Match Plan for Employees that requires employer matching contributions to the plan whenever an employee makes a contribution. The plan is similar to a 401(k)401(k)A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
plan, but with lower contribution limits and simpler (and thus less costly) administration. Although it is termed an IRA, it is treated separately. - Self-Directed IRASelf-Directed IRAA Self-Directed Individual Retirement Arrangement is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. IRS regulations require that either a qualified trustee, or custodian hold the IRA assets on behalf of the IRA owner...
- a self-directed IRA that permits the account holder to make investments on behalf of the retirement plan.
There are two other subtypes of IRA, named Rollover IRA and Conduit IRA, that are viewed as obsolete under current tax law (their functions have been subsumed by the Traditional IRA) by some; but this tax law is set to expire unless extended. However, some individuals still maintain these arrangements in order to keep track of the source of these assets. One key reason is that some qualified plans will accept rollovers from IRAs only if they are conduit/rollover IRAs.
What was formerly known as an Educational IRA is now called a Coverdell Education Savings Account
Coverdell Education Savings Account
A Coverdell Education Savings Account , is a tax-advantaged investment account in the United States designed to encourage savings to cover future education expenses A Coverdell Education Savings Account (also known as an Education Savings Account, a Coverdell ESA, a Coverdell Account, or just an...
.
Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001
Economic Growth and Tax Relief Reconciliation Act of 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 , was a sweeping piece of tax legislation in the United States by President George W. Bush...
(EGTRRA), many of the restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds could be rolled into were significantly relaxed. Additional acts have further relaxed similar restrictions. Essentially most retirement plans can be rolled into an IRA after meeting certain criteria, and most retirement plans can accept funds from an IRA. An example of an exception is a non-governmental 457 plan
457 plan
The 457 plan is a type of non-qualified tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis...
which cannot be rolled into anything but another non-governmental 457 plan.
The tax treatment of the above types of IRAs except for Roth IRAs are substantially similar, particularly for rules regarding distributions. SEP IRAs and SIMPLE IRAs also have additional rules similar to those for qualified plans governing how contributions can and must be made and what employees are qualified to participate.
Funding
- An IRA can only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA is a prohibited transaction and disqualifies the fund from its beneficial tax treatment.
- Rollovers, transfers, and conversions between IRAs and other retirement arrangements can include any asset.
- The maximum for an IRA contribution in years 2006 and 2007 is 100% of earned income or $4,000, whichever is less, for an individual under the age of 50. Individuals aged 50 and older can contribute up to 100% of earned income or $5,000, whichever is less. For 2008 through 2010, the limit is $5,000 for those under age 50, and $6,000 for those over 50.
- This limit is for Roth IRAs, traditional IRAs, or some combination of the two. You cannot put more than $5,000 into your Roth and traditional IRA combined ($6,000 for individuals aged 50 or more).
- For example, if you are 45 and put $3,500 into your traditional IRA this year so far, you can either put $1,500 more into your traditional IRA or $1,500 in your Roth IRA. There may be an additional administrative step needed so that the trustee which holds the IRA proceeds actually retitles or transfers the $3,500 Traditional proceeds into the Roth category for their internal bookkeeping to survive an IRS auditFinancial auditA financial audit, or more accurately, an audit of financial statements, is the verification of the financial statements of a legal entity, with a view to express an audit opinion...
.- The amount of the IRA contributions (both Traditional and Roth) that can be deducted from current-year taxes is partially reduced for levels of income beyond a threshold, and eliminated entirely beyond another threshold, if the contributor and/or the contributor's spouse is covered by an employer-based retirement plan. The dollar amounts of the thresholds vary depending on tax filing status (single, married, etc.) and on which spouse is covered at work. See IRS Publication 590, "Individual Retirement Arrangements".
Valid investments
Once money is inside an IRA, the IRA owner can direct the custodian to use the cash to purchase most types of securitiesSecurity (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
, and some non security financial instruments. Some assets cannot be held in an IRA such as collectibles (e.g., art, baseball cards, and rare coins) and life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
. Some assets are allowed, subject to certain restrictions by custodians themselves. For example an IRA cannot own real estate if the IRA owner receives or provides any immediate gain from/to this real estate investment. Examples of such gain would be the use of the property as the owner's personal residence or the benefit paid to an owner as property manager in the form of personal compensation for this service. The IRS specifically states that custodians may impose their own policies above the rules imposed by the IRS. It should also be noted that custodians cannot provide advice.
Many IRA custodians limit available investments to traditional brokerage accounts such as stocks, bonds, and mutual funds, and do not permit real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
in an IRA unless the real estate is held indirectly via a security such as a real estate investment trust
Real estate investment trust
A real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors...
(REIT). Self-directed IRA custodians/administrators can allow real estate and other non-traditional assets. For example, some options brokers allow their IRA accounts to hold stock options, which are derivatives, not securities. They typically charge fees based on asset values. There are certain special restrictions on real estate held in an IRA (the IRA owner cannot benefit from the property in any way, i.e. he or she cannot use it). Self Directed IRA's allowing non security investments are more complicated.
While certain types of investments are prohibited in an IRA, real estate is not one of them. As a result, real estate owned by an IRA can generate rental income and gain on a sale which escapes immediate taxation. However, the IRA does not get (or, need) the related deductions (e.g., depreciation, mortgage interest,property taxes, etc.).
An IRA may borrow money but any such loan must not be personally guaranteed by the owner of the IRA, and also the loan must be secured solely by assets in the IRA (in other words, a non-recourse loan). Also, the owner of the IRA may not pledge the IRA as security against a debt.
Even if a particular investment is permitted to be held in an IRA, care should be taken to optimize the location of the investment in a taxable account, a traditional IRA or a Roth IRA. For example, interest on municipal bonds is generally not taxable; it is thus generally not optimal to hold municipal bonds in an IRA.
Distribution of funds
Although funds can be distributed from an IRA at any time, there are limited circumstances when money can be distributed or withdrawn from the account without penalties. Unless an exception applies, money can typically be withdrawn penalty free as taxable income from an IRA once the owner reaches age 59 and a half. Also, non-Roth owners must begin taking distributions of at least the calculated minimum amounts by April 1 of the year after reaching age 70 and a half. If the required minimum distributionIRA Required Minimum Distributions
Required Minimum Distributions, often referred to as RMDs, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans.-Lifetime distributions:...
is not taken the penalty is 50% of the amount that should have been taken. The amount that must be taken is calculated based on a factor taken from the appropriate IRS table and is based on the life expectancy of the owner and possibly his or her spouse as beneficiary if applicable. At the death of the owner, distributions must continue and if there is a designated beneficiary, distributions can be based on the life expectancy of the beneficiary.
There are several exceptions to the rule that penalties apply to distributions before age 59½.
Each exception has detailed rules that must be followed to be exempt from penalties. The exceptions include:
- The portion of unreimbursed medical expenses that are more than 7.5% of adjusted gross income
- Distributions that are not more than the cost of medical insurance while unemployed
- Disability (defined as not being able to engage in any substantial gainful activity)
- Amounts distributed to beneficiaries of a deceased IRA owner
- Distributions in the form of an annuity, see Substantially equal periodic payments
- Distributions that are not more than the qualified higher education expenses of the owner or their children or grandchildren
- Distributions to buy, build, or rebuild a first home. ($10,000 lifetime maximum)
- Distribution due to an IRS levy of the plan
There are a number of other important details that govern different situations. For Roth IRAs with only contributed funds the basis
Cost basis
Basis , as used in United States tax law, is the original cost of property, adjusted for factors such as depreciation. When property is sold, the taxpayer pays/ taxes on a capital gain/ that equals the amount realized on the sale minus the sold property's basis.The taxpayer deserves a tax-free...
can be withdrawn before age 59½ without penalty (or tax) on a first in first out
FIFO
FIFO is an acronym for First In, First Out, an abstraction related to ways of organizing and manipulation of data relative to time and prioritization...
basis, and a penalty would apply only on any growth (the taxable amount) that was taken out before 59½ where an exception didn't apply. Amounts converted from a traditional to a Roth IRA must stay in the account for a minimum of 5 years to avoid having a penalty on withdrawal of basis unless one of the above exceptions applies.
If the contribution to the IRA was nondeductible or the IRA owner chose not to claim a deduction for the contribution, distributions of those nondeductible amounts are tax and penalty free.
Bankruptcy status
In the case of Rousey v. Jacoway, the United States Supreme Court ruled unanimously on April 4, 2005 that under section 522(d)(10)(E) of the United States Bankruptcy Code , a debtor in bankruptcyBankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
can exempt his or her IRA, up to the amount necessary for retirement, from the bankruptcy estate. The Court indicated that because rights to withdrawals are based on age, IRAs should receive the same protection as other retirement plans. Thirty-four states already had laws effectively allowing an individual to exempt an IRA in bankruptcy, but the Supreme Court decision allows federal protection for IRAs.
The Bankruptcy Abuse Prevention and Consumer Protection Act
Bankruptcy Abuse Prevention and Consumer Protection Act
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 , is a legislative act that made several significant changes to the United States Bankruptcy Code...
of 2005 expanded the protection for IRAs. Certain IRAs (rollovers from SEP or Simple IRAs, ROTH IRAs, individual IRAs) are exempt up to at least $1,000,000 (adjusted periodically for inflation) without having to show necessity for retirement. The law provides that "such amount may be increased if the interests of justice so require." Other IRAs (rollovers from most employer sponsored retirement plans (401(k)s, etc.) and non-rollover SEP and SIMPLE IRAs) are entirely exempt.
The 2005 BAPCPA also increased the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
insurance limit for IRA deposits at banks.
If an IRA engages in a "prohibited transaction," the assets in the IRA will no longer qualify for bankruptcy protection, according to one Federal Circuit Court of Appeals. See Willis v. Menotte, 11th Circuit Court of Appeals, 2011.
Protection from creditors
Many states have laws that prohibit judgments from lawsuits to be satisfied by seizure of IRA assets. For example, IRAs are protected up to $500,000 in Nevada from Writs of Execution. However, this type of protection does not usually exist in the case of divorce, failure to pay taxes, deeds of trust, and fraud. Assets in the IRA must have been deposited before a lawsuit exists to receive this protection.Borrowing
An IRA owner may not borrow money from the IRA except for a 2-month period in a calendar year. Such a transaction disqualifies the IRA from special tax treatment. An IRA may incur debt or borrow money secured by its assets but the IRA owner may not guarantee or secure the loan personally. An example of this is a real estate purchase within a self-directed IRA along with a non-recourse mortgage.According to one commentator, some minor planning can turn the 2-month period mentioned in the preceding paragraph into an indefinite loan.
Income from debt-financed property in an IRA may generate unrelated business taxable income in the IRA.
The rules regarding IRA rollovers and transfers allow the IRA owner to perform an "indirect rollover" to another IRA. An indirect rollover can be used to temporarily "borrow" money from the IRA, once in a twelve month period. The money must be placed in an IRA arrangement within 60 days, or the transaction will be deemed an early withdrawal (subject to the appropriate withdrawal taxes and penalties) and may not be replaced.
Rollovers as Business Start-Ups (ROBS)
ROBS is an arrangement in which prospective business owners use their 401(k) retirement funds to pay for new business start-up costs. ROBS is an acronym from the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
for the IRS ROBS Rollovers as Business Start-Ups
Rollovers as Business Start-Ups
ROBS is an arrangement in which prospective business owners use their 401 k retirement funds to pay for new business start-up costs. ROBS is an acronym from the United States Internal Revenue Service for the IRS ROBS Rollovers as Business Start-Ups Compliance Project.ROBS plans, while not...
Compliance Project.
ROBS plans, while not considered an abusive tax avoidance transaction, have been considered questionable because they may solely benefit one individual – the individual who rolls over his or her existing retirement 401(k) withdrawal funds to the ROBS plan in a tax-free transaction. The ROBS plan then uses the rollover assets to purchase the stock of the new business. A C corporation
C corporation
C corporation refers to any corporation that, under United States income tax law, is taxed separately from its owners. It is distinguished from an S corporation, which is not taxed separately. Most major companies are treated as C corporations for U.S. income tax purposes.-C corporation vs...
must be set up in order to roll the 401(k) withdrawal.
ROBS Project Findings: New Business Failures
Preliminary results from the ROBS Project indicate that, although there were some success stories, most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State. Some of the individuals who started ROBS plans lost not only the retirement assets they accumulated over many years, but also their dream of owning a business. As a result, much of the retirement savings invested in their unsuccessful ROBS plan was depleted or ‘lost,’ in many cases even before they had begun to offer their product or service to the public.Double taxation
Double taxationDouble taxation
Double taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
still occurs within these tax-sheltered
Tax shelter
Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments...
investment arrangements. For example, foreign dividends may be taxed at their point of origin, and the IRS does not recognize this tax as a creditable deduction. There is some controversy over whether this violates tax treaties, such as the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital.
Similar schemes in other countries
- Registered Retirement Savings PlanRegistered Retirement Savings PlanA Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP's purpose is to promote savings for retirement by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act...
(RRSP) (CanadaCanadaCanada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
) - Superannuation in AustraliaSuperannuation in AustraliaSuperannuation is a retirement program in Australia. It has a compulsory element whereby employers are required by law to pay an additional amount based on a proportion of an employee's salaries and wages into a complying superannuation fund.An individual's superannuation fund can be accessed...
- Individual Savings AccountIndividual Savings AccountAn Individual Savings Account is a financial product available to residents in the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding...
(ISA) (United KingdomUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
)
See also
- 401(k)401(k)A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
- 401(k) versus IRA comparison matrix401(k) IRA matrixThis is a comparison between 401, Roth 401, and Traditional Individual Retirement Account and Roth Individual Retirement Account accounts, four different types of retirement savings vehicles that are common in the United States.-Comparison:...
- Roth 401(k)Roth 401(k)The Roth 401 is a type of retirement savings plan. It was authorized by the United States Congress under the Internal Revenue Code, section 402A, and represents a unique combination of features of the Roth IRA and a traditional 401 plan. As of January 1, 2006 U.S...
- 403(b)403(b)A 403 plan, also known as a tax-sheltered annuity, is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers , cooperative hospital service organizations, and self-employed ministers in the United States...
- Internal Revenue ServiceInternal Revenue ServiceThe Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
- Rollovers as Business Start-UpsRollovers as Business Start-UpsROBS is an arrangement in which prospective business owners use their 401 k retirement funds to pay for new business start-up costs. ROBS is an acronym from the United States Internal Revenue Service for the IRS ROBS Rollovers as Business Start-Ups Compliance Project.ROBS plans, while not...
- Self-Directed IRASelf-Directed IRAA Self-Directed Individual Retirement Arrangement is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. IRS regulations require that either a qualified trustee, or custodian hold the IRA assets on behalf of the IRA owner...
- Traditional IRATraditional IRAEstablished by the Tax Reform Act of 1986, . A Traditional IRA is an individual retirement account in the United States...
- Roth IRARoth IRAA Roth IRA is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The tax law of the United States allows a tax reduction on a limited amount of saving for retirement. The Roth IRA is named for its chief legislative sponsor, Senator...
External links
- IRA Online Resource Guide IRS.gov
- Retirement Plans FAQs regarding IRAs IRS.gov
- IRA Publication 590 IRS.gov