7 common retirement questions answered

2. What should I do with distributions?

Generally, distributed money is subject to income taxes and a 10 percent early withdrawal penalty if you’re under 59½ years old (except in certain circumstances). If you want the money before you reach 59½, you’ll pay 20 percent to 40 percent in taxes and penalties. Federal rules require 20 percent tax withholding on any distribution paid to you, which may be more or less than your actual tax due. You’ll settle up with the Internal Revenue Service when you file your next income-tax return.

3. What is an IRA rollover account?

Federal law allows people getting large pension and profit-sharing plan distributions to deposit them into an individual retirement account without paying taxes. Since these distributions would usually be taxable, the immediate tax savings can be considerable. After age 59½, distributions from your IRA rollover account are subject to income taxes but no early withdrawal penalty. Distributions can be sent directly to your IRA rollover custodian without the 20 percent required withholding tax.

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4. What is a Roth IRA?

This is a special type of individual retirement account. Unlike traditional IRAs, there is no tax break for making contributions, but the money enjoys tax-deferred growth and tax-free withdrawals in the future. Distributions from pension and profit-sharing plans may be rolled into Roth IRA accounts, but only after paying federal and state income taxes on the distribution. This tax bite can be sizable, so many people choose a traditional IRA rollover account instead.

5. What investments are allowed in an IRA rollover account?

Legally, there are few limitations on IRA investing. Investors can choose money market funds or insured certificates of deposit (CDs) at a bank. They may use stocks, bonds or mutual funds. They may choose certain insurance products or contracts. There are very few limitations. However, a particular advisor or custodian for your account may limit the options. In other words, a bank may offer only certificates of deposit; an insurance agent may offer only annuities. For these and other reasons, choosing the right advisor for your retirement account is very important.

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