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Traditional IRA Rules

A traditional IRA is a type of retirement account in the United States of America. A traditional IRA is an Individual Retirement Account that can be set up by individuals at institutions like banks or brokerage firms. One will be able to invest this account into anything that the institution may allow. There are various rules that govern traditional IRAs and one may have questions about these rules when an individual is planning to set up an account. Given below are some of the important questions about traditional IRAs that have been answered by the Experts.

Will a person face any penalties for converting a traditional IRA into a Roth IRA?

A person may not face any penalties for converting a traditional IRA into a Roth IRA. However, the individual may have to include the amount that was converted as taxable income while filing their returns.

Can an S Corporation set up a traditional IRA and an SEP account at the same time?

It may be possible for an S Corporation to set up a Simplified Employee Pension (SEP) account and a traditional IRA at the same time. The company may also transfer funds between these two accounts.

What is the difference between a simple IRA and a traditional IRA?

A simple IRA refers to a savings incentive match plan for an employee who is set up by the employer whereas a traditional IRA is an individual retirement arrangement or account which can be set up by different individuals.

Can a person transfer a traditional IRA to their ex-spouse without any tax implications?

A person may be able to transfer a traditional IRA to their ex-spouse without any tax implications only if the transfer is made through a divorce decree or a separate maintenance and property settlement agreement. If the transfer is made under any other situation, the money may be taxable and the individual may also have to pay a penalty.

Would a person have to pay tax and penalty if he/she used money from the traditional IRA to pay for COBRA?

In most situations, an individual may not have to pay penalty if he/she used the money from a traditional IRA to pay for Consolidated Omnibus Budget Reconciliation Act (COBRA). The individual may not have to pay any tax on that money under the following circumstances:

  • The person loses their job
  • The individual has received unemployment benefits under the federal or state law for 12 consecutive weeks
  • The individual takes the benefits either the same year or the following year of receiving the unemployment compensation
  • The benefits are withdrawn not more than 60 days after the individual gets a job again.

What is the process of converting a traditional IRA to a Roth IRA?

In the case of converting a traditional IRA to a Roth IRA, the person will have to rollover the funds from an eligible retirement plan. The Roth IRA can be created with the same custodian as the traditional IRA. The custodian may be instructed to transfer either all or a part of the funds to the Roth IRA. The person can also take the funds of the traditional account and roll them over personally into the Roth IRA account within 60 days. Though there is a limit on the amount that can be contributed while funding a Roth IRA account, there may be not limit with regards to converting the traditional IRA to a Roth. One may also not have to pay any penalties for the conversion.

There are different kinds of IRA accounts that may be available to you. You need to understand how each of these work and how different they are from each other in order to be able to operate them properly. Sometimes, it can get confusing to understand the various features of these IRA accounts on your own and you may need to take the help of a professional. You may ask an Expert if you have any doubts or difficulty in understanding traditional IRAs.

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