By: FaithFi, Rob West & Jim Henry
Do you think you know everything about your IRA? Find out by taking this pop quiz.
First, a little inspiration. Proverbs 18:15 reads, “An intelligent heart acquires knowledge, and the ear of the wise seeks knowledge.” So let’s seek some knowledge about IRAs.
Don’t worry, our quiz won’t count toward your final grade and just to make it easy, these will all be true or false questions.
Question #1: You can’t open an Individual Retirement Account if you already have a qualified retirement plan with your employer. True or false?
It’s actually 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.
Question #2: You can invest in anything in an IRA. True or false?
That one is 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 investment 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 animal, a self-directed IRA.
Question #3: If you should die, your IRA must go through probate and be distributed to your heirs according to your will. True or false?
That one, fortunately, is also false. Like many financial accounts, your IRA allows you to name one or more beneficiaries to receive those funds in the event of your 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, such as the death of a spouse. The custodian can’t read your mind, so making your intentions known with a new beneficiary designation is necessary.
Question #4: At some point, you have to take money out of your IRA. True or false?
Unfortunately, that one is 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. Uncle Sam, however, sees it differently. He wants his cut and is only willing to wait so long. That means 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.
Now, 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 and you really want to pay attention to those notices. If you fail to take an RMD on time, the penalty is a whopping 25% of every dollar you failed to withdraw. This is why a Roth IRA is sometimes a better alternative since it’s funded with after-tax dollars and has no required minimum distributions.
Question #5: You can’t borrow from your traditional IRA. True or false?
That is also 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 a large withdrawal could push some of your income into a higher tax bracket. You certainly don’t want to do that.
That’s our pop quiz. We hope you did well. Now pass your papers to the front, please.