Regardless of age, the IRA owner will need to file a Form 1040 and show the amount of withdrawal from the IRA. Since the withdrawal was taken before reaching age 59 1/2, unless certain exceptions listed in Publication 590 Individual Retirement Arrangements (IRAs) are met, the IRA owner will need to pay an additional 10 percent tax on early distributions from qualified retirement plans that is reported on Form 1040. A Form 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, may need to be completed and attached to the tax return.
- Instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAs), and Other Tax-Favored Accounts
- Tax Topic 451, Individual Retirement Arrangements (IRAs)
- Tax Topic 557, Tax on Early Distributions From Traditional and Roth IRAs.
Required minimum distributions apply each year beginning with the year the account owner turns age 70 1/2. The required minimum distribution for each year is calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy. An account owner can determine his or her applicable distribution period or life expectancy by using the Tables in Appendix C of Publication 590. Table I is used by beneficiaries. Table II is for use by owners who have spouses who are both the IRA's sole beneficiary and who are more than 10 years younger than the owner. Table III is for use by all other owners.
An IRA can be rolled over into a qualified retirement plan, assuming the qualified retirement plan has language permitting such rollovers. You need to check with 401k plan administrator.
- Age (i.e. time between now & retirement)
- Your income & expenses.
- Tax bracket now & after retirement.
- Returns i.e. earnings on your contributions.
Typically in long run Roth IRA beats Traditional IRA.
Assuming you get 10% average return on your Roth IRA investment, it is better to go for Roth IRA. Longer the money in Roth IRA, more time for earnings to grow. So eventually your earnings (gains/interest) will be far more than your actual contribution. And real gem of Roth IRA is, earnings are TAX FREE after 59 1/2 yrs!!
Yes! You can contribute to both Roth and Traditional IRAs same time provided total of contributions in both IRAs is not more than maximum contribution allowed for any IRA ($4000).
Maximum contribution allowed for any IRA (Traditional or Roth) is $4000 for year 2006/2007 (age < 50 yrs).
For example: If you contribute $1000 in Traditional IRA, then you can contribute $3000 more in Roth IRA same time that year (2006 or 2007).
Note: For age >= 50 years, additional $1000 can be contributed in IRA.
Rollover - A distribution from a traditional IRA can be contributed to a Roth IRA within 60 days after distribution.
Same trustee transfer - As with the trustee-to-trustee transfer, the financial institution holding the traditional IRA assets will provide directions on how to transfer those assets to a Roth IRA. In this case, things should be simpler because the transfer occurs within the same financial institution.
A conversion results in taxation of any untaxed amounts in the traditional IRA. Also, the conversion is reported on Form 8606, Nondeductible IRAs.
Yes, one can contribute to traditional IRA even if covered by employer 401k plan, but it will be non deductible contribution (No tax deferred).