Things You May Not Know About an IRA

Show Notes

So you think you know everything about your IRA? Well, get ready for a pop quiz. Whether you already have an IRA, or you’re thinking about opening one, there are several things you should know. And what better way to measure the depth of your knowledge with a little test.

• First a little inspiration from Proverbs 18:15 - “An intelligent heart acquires knowledge, and the ear of the wise seeks knowledge” so let’s SEEK SOME KNOWLEDGE about IRAs!
• Here’s our little quiz... just to make it easy, these will all be true or false questions.
• 1 - You can’t open an Individual Retirement Account if you already have a qualified retirement plan with your employer. True or false?
• FALSE - An IRA can be a great way to supplement your retirement savings, even if you have a 401k or 403b with your employer. In 2023, you can contribute up to $6,500 to a traditional or Roth IRA, or $7,500 if you’re 50 or older. You can even have a traditional and a Roth IRA, but the combined contributions must not exceed those limits.
• 2- You can invest in anything in an IRA. True or false?
• FALSE - Your IRA isn’t an investment in itself; it’s more like a bucket that holds your investments, which are managed by the account’s custodian. That custodian will offer you a WIDE VARIETY of investing options, like bonds, money market funds, stocks, and mutual funds.
• But THERE ARE LIMITS. You can’t invest in things like whole life insurance policies, antiques, or physical precious metals. That last one requires a different thing - a self-directed IRA, which is a topic for another time.
• 3 - If you should die, your IRA must go through probate and be distributed to your heirs according to your will. True or false?
• FALSE - Like many financial accounts, your IRA allows you to name one or more beneficiaries to receive those funds in the event of your untimely death. The beneficiary designation supersedes anything specified in a will and prevents the IRA from going through the sometimes lengthy probate process.
• You do, however, have to keep the beneficiary designation up to date if you go through a major life change, like the death of a spouse. The custodian can’t read your mind, so making your intentions known with a new beneficiary designation is vital.
• 4 - At some point, you have to take money out of your IRA. True or False?
• TRUE - Traditional IRAs come with Required Minimum Distributions or RMDs. When you retire, you may not need the income generated by your IRA, and you’d be perfectly content to just let those assets accumulate but Uncle Sam sees it differently, wanting his cut and only willing to wait so long.  You’ll have to start taking money out of your traditional IRA by April 1st of the year after the year you turn 73 and a half. In 2033, the age for RMDs will be extended to 75.
• If you’re worried that you’ll need a calculator and calendar to figure all that out, don’t worry. IRA custodians are required to send you an RMD notice by January 31 each year.
• PAY ATTENTION TO THOSE NOTICES because if you fail to take an RMD on time, the penalty is a whopping 25% of every dollar you failed to withdraw. Here’s where a Roth IRA is a better alternative, since it’s funded with after-tax dollars and has NO REQUIRED MINIMUM DISTRIBUTIONS.
• 5 - You can’t borrow from your traditional IRA. True or False?
• TRUE - While you may be allowed to borrow from a 401k or 403b, (not advisable, by the way) you can’t borrow from an IRA even for a good cause like buying a house or sending your kid to college. If you withdraw funds from your traditional IRA, the money will be added to your adjusted gross income and taxed at your income tax rate … and it’s possible that the withdrawal could push some of your income into an even higher tax rate. So you don’t want to do that.
• Those are some of the things you may not have known about an IRA. We hope you did well on our pop quiz.

Next, Rob answers these questions at 800-525-7000 or via email at askrob@FaithFi.com:

• If you have some cash that you've been holding onto, is it idea to put it into a Money Market right now?
• If you're 63 and retired and your husband is 12 years old and not in good health, will taking your benefits first affect the survivor's benefits from his Social Security later?
• If you and your husband have very few deductions which left you, this year with a much higher tax payment, instead of raising your W4 withholding, would it be better to put more into contributing to an IRA?
• If you're considering turning your garage into a AirBnb room for rent, how should you finance this?

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