3 Things You Must Know About Your IRA

Individual Retirement Accounts have been around for more than twenty years. Over this period, millions of us have been dutifully contributing the maximum each year. But just because IRAs are familiar doesn’t mean you really know their shortcomings as well as their benefits. Here are some points to consider as you review your IRA and the way you have set it up.

Your IRA is not governed by your will.
When you opened your IRA you filled out something called an adoption agreement. This is a legal document. Regardless what your will or trust specifies, your IRA will go to the person or organization you named as your beneficiary in the adoption agreement.

A number of years may have passed since you filled out your IRA paperwork. Do you remember the person you named as your beneficiary? (A former spouse, for instance?) Who is your contingent beneficiary? Do you still want these individuals to inherit your IRA?

Some penalty-free ways to tap your IRA early.

Every IRA owner I have run into can recite the rule that if you withdraw money from your IRA before age 59½ (assuming it’s a traditional IRA), you are subject to a 10% penalty in addition to income tax on the amount withdrawn. }

In fact, there are a number of provisions that enable you to access your IRA early and avoid that penalty. Here are a few: to pay for college tuition; to make a first-time home purchase for yourself, a child or a parent (the maximum is $10,000 and it’s allowed only once); as part of the division of marital property in a divorce; because you become disabled; because you inherit an IRA whose owner died before age 59½.

If none of these situations applies, you can simply set up what the Internal Revenue Service calls a series of substantially equal periodic payments. These withdrawals must continue for at least 5 years or until you reach 59½, whichever takes longer.

Your IRA can live on after you’re gone.
The main attraction about an IRA is that your money grows either tax deferred (traditional IRA) or tax free (Roth IRA).  But few people realize that the tax benefits an IRA offers can continue even after you die.

If the IRA is set up properly, the tax advantages transfer to the person who inherits your IRA. This could be your spouse or anyone else.

The first step is to name the proper beneficiary.

If your IRA is set up correctly, for example, a 5-year old granddaughter who inherits it could receive income from it for 77 years (based on her life expectancy), because the money continues to grow and compound in this tax-sheltered account.

Thanks to rollovers as they changed jobs, for many Americans their IRA represents their biggest asset.   I strongly suggest consulting a financial advisor to ensure yours is set up correctly.

–  Gail Buckner, CFP, Senior Vice President
     Senior Marketing Officer, Putnam Investments

The views expressed here are those of the author, and are subject to change. They should not be construed as investment, financial or tax advice.

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