Our resident expert, Sharon Kreider, answers Q&As from the common and interesting questions Western CPE receives daily.

The following questions are related to our Federal Tax Update, specifically, they focus on 401Ks and IRAs.

[Question]
What is the due date for an entirely employer-funded plan changed? Does this include 401K and a simple IRA plan?

[Question]
A taxpayer has made a Roth IRA conversion (From a traditional IRA), in 2018, 2019, and again in 2020. Does each conversion have its own 5-year holding period, or does the first conversion in 2018 start the 5-year timeline?

[Question]
Is there an age limitation for solo 401K contribution for the sole owner of Schedule C?

[Question]
Can a 73-year-old, still working, contribute to a Roth IRA?

[Question]
Are Roth 401K and Roth IRA both protected from creditor claims?

…(read more)

LEARN MORE ABOUT: IRA Accounts

CONVERTING IRA TO GOLD: Gold IRA Account

CONVERTING IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA

IRA and 401k are two great retirement savings tools that offer tax advantages to individuals. However, navigating the rules and regulations surrounding these accounts can be confusing. In this article, we will address five common questions regarding IRA and 401k accounts to help clarify some of the complex details.

1. Can I contribute to both an IRA and a 401k?
Yes, you can contribute to both an IRA and a 401k. The contribution limits for 2021 are $6,000 for an IRA and $19,500 for a 401k. If you are over the age of 50, you can make catch-up contributions of an additional $1,000 for an IRA and $6,500 for a 401k. Keep in mind that there are income limits for contributing to a traditional IRA if you are covered by a retirement plan at work, so be sure to check the rules before making contributions.

2. What are the differences between a traditional and a Roth IRA?
The main difference between a traditional and a Roth IRA is how they are taxed. With a traditional IRA, contributions are typically tax-deductible, and the funds grow tax-deferred. However, withdrawals in retirement are taxed as ordinary income. On the other hand, Roth IRA contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free. Additionally, there are income limits for contributing to a Roth IRA, so high-income earners may not be eligible to contribute.

3. Are there penalties for early withdrawals from an IRA or 401k?
Yes, there are penalties for early withdrawals from both an IRA and a 401k. If you withdraw funds from a traditional IRA or a 401k before the age of 59 ½, you may incur a 10% early withdrawal penalty in addition to having to pay income taxes on the distribution. There are some exceptions to this rule, such as using the funds for certain qualified expenses like a first-time home purchase or higher education costs.

4. Can I roll over my 401k into an IRA?
Yes, you can roll over your 401k into an IRA. This can be a beneficial strategy for individuals who want more control over their investment options or to consolidate multiple retirement accounts. A direct rollover is typically the best way to do this, as it avoids any tax consequences. You will need to contact your 401k plan administrator and the financial institution where you want to open the IRA to initiate the rollover.

5. What are required minimum distributions (RMDs) and when do I need to take them?
Required minimum distributions (RMDs) are the minimum amount of money that must be withdrawn from a traditional IRA or a 401k account each year once you reach the age of 72. Failure to take RMDs can result in a hefty 50% penalty on the amount that should have been withdrawn. Roth IRAs are not subject to RMDs during the account owner’s lifetime, but beneficiaries will need to take RMDs after the original account owner passes away.

Understanding the ins and outs of IRA and 401k accounts can be challenging, but having a good grasp on these essential retirement savings vehicles can help you make informed decisions about your financial future. It’s always a good idea to consult with a financial advisor or tax professional to ensure you are maximizing the benefits of these accounts while staying compliant with the rules and regulations.