Individual Retirement Accounts

Personal retirement accounts with tax-free growth or on a tax-deferred basis to help you save for retirement.

Traditional IRA

A personal account where contributions may be tax deductible; investments grow tax-deferred until there is a withdrawal. IRA stands for Individual Retirement Arrangement and it is an investment vehicle created by the US government to allow working individuals to save up to $5,500 in year 2016 for their retirement. Investing for retirement with a Traditional IRA account will allow you to deduct all or part of your contributions from your taxable income. The investment earnings of your IRA are not subject to federal income tax until distributions (withdrawals) are made.

Who is eligible to contribute to a Traditional IRA?

You can establish and make contributions to a Traditional IRA Account if you: 1. received taxable compensation during the year; and 2. have not yet reached the age of 70 1/2. If a married person does not work or has limited compensation, his or her spouse can contribute up to $5,500 to a spousal IRA. Spousal IRAs can be set up even if the taxpayer does not contribute to his or her own IRA, or contributions may be made for both spouses.

How much can I contribute?

As per the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the annual contribution limit for both Traditional and Roth IRAs will be indexed for inflation after 2008.

Year IRA Contribution Limit Catch-up Contributions (age 50 or over)
2016 $5,500 $1,000
2017 $5,500 $1,000

Higher Limits for Age 50 or over

Workers aged 50 or over will be able to contribute a bit more to their IRAs. This provision is intended to allow older workers who haven't saved enough for retirement to make up for lost time and "catch up" on their contributions.

Those aged 50 and over before the end of the taxable year will be eligible to contribute $1000 more than the regular limits.

What is an "Active Participant"?

Generally, you will be considered an "active participant" if you are covered by one or more of the following employer-sponsored retirement plans:

  1. Qualified pension, profit sharing, 401(k), or stock bonus plan;
  2. Qualified annuity plan;
  3. Simplified employee pension (SEP) plan;
  4. Retirement plan established by the Federal government, a State, or a political subdivision;
  5. Tax sheltered annuity for employees of certain tax-exempt organizations or public schools;
  6. A plan meeting the requirements of IRC Section 501(c)(18);
  7. Qualified plan for self-employed individuals (H.R.10 or Keogh Plan);
  8. SIMPLE IRA Plan or a SIMPLE 401(k) plan.

If you do not know whether your employer maintains one of these plans or whether you are considered an active participant, check the FORM W-2 (Wage and Tax Statement) that you receive at the end of the year from your employer which will indicate whether you are deemed an active participant.

Can I contribute to Traditional IRA if I am an "Active Participant"?

If you are an "Active Participant" you may be able to deduct all or part of your contributions from your taxable income. It depends on your Adjusted Gross Income (AGI). Please see IRS Publication 590.

If you are covered by an employer sponsored retirement plan and are single, the deductible amount of your contribution will be determined by your Adjusted Gross Income (AGI). Please see IRS Publication 590.

If you are not covered by an employer sponsored retirement plan, your IRA contribution may be totally deductible.

If you are not covered by an employer sponsored retirement plan but your spouse is covered, you may be able to contribute. Please consult with your tax advisor.

When can I withdraw from a Traditional IRA?

Once you reach age 59 1/2, you are entitled to receive IRA distributions without any penalty. However, if you are under age 59 1/2 and receive an IRA distribution, an additional penalty of 10% will apply, unless you claim one of the following exceptions:

  1. First-time home purchase - up to $10,000.
  2. Qualified education expenses - for you, your spouse, your children or even your grandchildren.
  3. You become disabled - to qualify you must prove that you are incapable of working.
  4. Unreimbursed medical expenses - expenses must exceed 7.5% of your adjusted gross income.
  5. Health insurance for the unemployed - only after 12 consecutive weeks of collecting unemployment benefits.
  6. Substantially equal annuity payments.

What is the "Required Minimum Distribution" for a Traditional IRA?

Generally, the first distribution must be made by April 1st of the year following the year age 70 1/2 is attained. In subsequent years, the distribution must be made by December 31st.

The participant must determine the minimum amount required to be distributed each year. The participant can always withdraw more than the required minimum distribution.

If you need more information on Required Minimum Distribution, please see IRS Publication 590.

Roth IRA

Unlike contributions to a Traditional IRA, contributions made to a Roth IRA are not deductible. The major benefit of Roth IRAs is that earnings from investments are tax-free.

What are the eligibility requirements for a Roth IRA Account?

Unlike the Traditional IRA, there is no 70 1/2 age limit on making contributions. Individuals of any age with compensation are eligible to contribute to a Roth IRA. The total amount you may contribute to a Roth IRA for 2016 can not exceed the lesser of $5,500 or 100% of compensation ($11,000 for married couples).

If you maintain a Traditional IRA, the maximum contribution to your Roth IRA is reduced by any contributions made to your Traditional IRAs.

How much can I contribute?

By the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA ), the annual contribution limit for both traditional and Roth IRAs will be indexed for inflation starting on the year 2008.

Year IRA Contribution Limit Catch-up Contributions (age 50 or over)
2016 $5,500 $1,000
2017 $5,500 $1,000

When can I withdraw from a Roth IRA?

For distributions to be "qualified distributions" that are entirely tax free, they have to meet two requirements. First, the distribution must be made after the 5-tax-year period beginning with the first tax year for which a contribution was made to an individual's Roth IRA. Second, the distribution must be made after one of the four following events has occurred:

  • The participant has attained age 59 1/2.
  • The distribution is paid to a beneficiary due to the participant's death.
  • The participant has become disabled.
  • The withdrawal is made to pay qualified first-time home buyer expenses.

Amount of Roth IRA Contributions That You Can Make for 2016

If your filing status is... And your modified AGI is... Then you can contribute...
married filing jointly or qualifying widow(er)

< $184,000

up to the limit
> $184,000 but < $194,000 a reduced amount
> $194,000 zero
married filing separately and you lived with your spouse at any time during the year

< $10,000

a reduced amount
> $10,000 zero
single, head of household, or married filing separately and you did not live with your spouse at any time during the year < $117,000 up to the limit
> $117,000 but < $132,000 a reduced amount
> $132,000 zero

Amount of Roth IRA Contributions That You Can Make for 2017

If your filing status is... And your modified AGI is... Then you can contribute...
married filing jointly or qualifying widow(er)

< $186,000

up to the limit
> $186,000 but < $196,000 a reduced amount
> $196,000 zero
married filing separately and you lived with your spouse at any time during the year

< $10,000

a reduced amount
> $10,000 zero
single, head of household, or married filing separately and you did not live with your spouse at any time during the year < $118,000 up to the limit
> $118,000 but < $133,000 a reduced amount
> $133,000 zero

How do you decide between a Traditional IRA and a Roth IRA?

The answer to this question depends on a number of variables including your assumptions about your future tax rates. For example:

  • If you are not eligible to deduct Traditional IRA contributions but qualify for a Roth IRA, then the Roth IRA is the better choice. Roth IRA contributions are made in after-tax dollars while earnings are generally are not taxable.
  • If your Traditional IRA contribution is tax deductible and you are also eligible to contribute to a Roth IRA, then
    1. if you expect your retirement tax rate to be equal or higher than it is today, a Roth IRA should yield the greatest benefit.
    2. if you expect your retirement tax rate to be much lower than it is today, you should probably choose a Traditional IRA.

401k Rollover IRA

A Rollover IRA is an Individual Retirement Account that you may use if you're changing jobs or retiring to keep your investments growing tax-deferred without incurring penalties. By directly rolling over assets from your employer-sponsored retirement plan into an IRA Rollover, you'll defer your tax liability and may be able to completely avoid penalties. You may invest Rollover IRA assets in a wide range of investments including mutual funds, stocks, bonds, and CDs. Having a wide choice of investments to select can help you re-allocate your retirement portfolio to better fit your current investing time horizon and risk tolerance.

What plans qualify for a rollover or a direct rollover into an IRA?

You can request a direct rollover into a Rollover IRA from any of these plans:

  • 401(k)(contact plan administrator for rollover information)
  • 403(b)(contact plan administrator for rollover information)
  • Qualified Retirement Plans(Profit Sharing & Money Purchase Pension Plans)
  • ESOPs(Employee Stock Ownership Plans)
  • Thrift Savings Plans

Note: Only funds received from a Qualified Retirement Plan (QRP) - as governed by Internal Revenue Code Section 401(a) or a 403(b) TSA are eligible to be rolled over (rollover) or directly rolled over (direct rollover to an IRA).

How do I rollover my retirement plan directly to Firstrade

Rollover to Traditional IRA

Use the following procedure to move money from a former employer's qualified retirement plan (such as 401(k), profit sharing plan, or money purchase pension plan) to a Rollover IRA at Firstrade.

  • STEP 1: Open a Rollover IRA: IRA Online Application
  • STEP 2: Transfer from former company's retirement plan

Rollover to Roth IRA

If you want to move your money to a Roth IRA, your earnings for that year must be less than $100,000. First move the funds into a Rollover IRA at Firstrade, then convert your Rollover IRA to a Roth IRA. You'll have to pay taxes on the money you convert, and you won't be allowed to roll the money over to a new employer's plan in the future.

Some employer plans offer mutual funds that are not registered for public sale or proprietary mutual funds that are not transferable to IRAs at other firms. Before you can move these to your rollover account, first redeem your shares for cash through your former plan.

What is a "Direct Rollover"?

A Direct Rollover is when your employer sends your vested retirement plan balance directly to your IRA Account. This method allows you to avoid the 20 percent mandatory withholding imposed by the IRS if the distribution is paid directly to you.

To directly rollover to Firstrade, simply open a Rollover IRA and tell your benefits plan administrator that you want to directly roll over your distribution to Firstrade. Your employer will have you sign a form to authorize the rollover. Then, your employer will either deliver your distribution payout directly to your account, or provide you a check made payable to Firstrade Securities. Once you receive the check, you should deposit it immediately into your Rollover IRA.

Can I get back the 20% of my plan distribution withheld by my employer?

Yes. If you deposit your check into a Rollover IRA within 60 days, including the amount equal to the 20% withheld. If you do not make up the withheld amount, it will be considered a distribution and taxed as ordinary income. It could also be subject to a 10% early withdrawal penalty. By funding your Rollover IRA within 60 days with 100% of your retirement plan payout, you'll receive the 20% withheld by your employer as a tax credit when you file your tax return. It's important to remember that any amount of your payout not deposited into a qualified tax-advantaged account within 60 days is subject to the same taxes and penalties. And, you'll lose the opportunity to put those funds into a tax-deferred Rollover IRA.

*This information should not be construed as providing tax or legal advice. Please consult with your tax advisor or attorney regarding your individual situation.

The Basics: Retirement 101