Skip to main content
Feb. 6, 2013

One of the most common misunderstood financial planning concepts that we come across when meeting with new clients is the Individual Retirement Account also more commonly known as an IRA.  The most common misconceptions we find with respect to IRAs typically are:

1.) That an IRA is a type of investment which earns a certain rate of return and

2.) That one can contribute any lump sum they receive into an IRA.

An IRA is a type of investment account. It is a form of retirement plan provided by many financial institutions that offers tax advantages for retirement savings in the United States as described in IRS Publication 590, Individual Retirement Arrangement (IRAs).  Within this type of account one may invest in many different types of investments or simply hold the contributions in cash.  Second, depending on the type of IRA, as described below, one is limited to a certain amount which they can contribute to an IRA in a year and which must come from EARNED INCOME and not another asset.  For example, many times when someone receives an inheritance, which is outside of an IRA there is the common misconception that they can simply contribute the entire inheritance to an IRA and thereby make it tax deferred.  Unfortunately, again IRAs are governed by strict limits as to the annual amounts one can contribute to them and the contribution must come from earned income (with the exception of spouses who can contribute on behalf of their non working spouse if the working spouse has earned income).  A brief discussion of the types of IRA follows:

There are several types of IRA:

  • Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted). Depending upon the nature of the contribution, a traditional IRA may be referred to as a “deductible IRA” or a “non-deductible IRA.” It was introduced with the Tax Reform Act (TRA) of 1986.
  • Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. Named for Senator William V. Roth, Jr.  The Roth IRA was introduced as part of the Taxpayer Relief Act of 1997.
  • SEP IRA – a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee’s name, instead of to a pension fund in the company's name.
  • SIMPLE IRA – a Savings Incentive Match Plan for Employees that requires employer matching contributions to the plan whenever an employee makes a contribution. The plan is similar to a 401(k) plan, but with lower contribution limits and simpler (and thus less costly) administration. Although it is termed an IRA, it is treated separately.

There is one instance in which a lump sum can be contributed to an IRA (typically a Traditional IRA) and that is when someone is leaving a position where they had an employer sponsored qualified retirement plan such as a 401(k).  In this instance the balance of their 401(k) no matter how large can be "rolled" into an IRA (also known as an IRA rollover account) which is then controlled by the individual and not their former company.


White House Financial & Settlement Consulting helps families live easier and less stressful lives through the proper management of their financial resources.  We do this by acting as our clients’ trusted advisor providing a personal touch customized to the client’s needs!  Please visit our web site at www.whitehousellc.com  or contact us directly for more information!



White House Financial & Settlement Consulting, LLC

COMPREHENSIVE - CLIENT FOCUSED - FINANCIAL ADVICE

114 South Main Street· Suite 300 · Chelsea, Michigan 48118 · Phone: (734) 433-1670 · Fax: (734) 433-1671



Securities offered through Sigma Financial Corporation. Member FINRA/SIPC

Sigma Planning Corporation, A Registered Investment Advisor
CAUTION: electronic mail sent through the Internet is not secure and could be intercepted by a third party. For your protection, avoid sending identifying information, such as account, Social Security, or card numbers to us or others. Further, do not send time-sensitive, action-oriented messages, such as transaction orders, fund transfer instructions, or check stop payments, as it is our policy not to accept such items electronically. Please be aware that we do not provide tax or legal advice, and that the information set forth herein was obtained from sources which we believe reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities.


Comments

Popular posts from this blog

Using a structured settlement annuity pre-suit

 We recently were engaged by the Guardian Ad Litem (GAL) in the case of an 11 year old boy who was struck by a care while riding his bike.  The father of the boy settled the case directly with the liability auto insurance carrier pre-suit and the GAL contacted us to ensure that the boy's settlement funds were handled appropriately. The case settled for a total of $65,000 and $59,000 was being allocated to the structured settlement annuity for the boy as follows: $5,000 paid immediately upon settlement $10,000 at age 18 $20,000 at age 21 $25,000 at age 25 $35,718 at age 30 this is total benefits of $95,718! The annuity was placed with a large life insurance company rated A+ by the A.M. Best rating agency and provided the family and GAL with the peace of mind that the young man would not receive the entire amount at age 18. In addition, due to the use of the structured settlement annuity, all of the interest gained during the payout period ($31,718 to be exact) is INCOME TAX FREE!  T

Michigan Association of Justice Workers Compensation Seminar

We had an awesome time at the Michigan Association of Justice Worker's Compensation seminar where Cyril spoke on the best strategies for using structured settlements in Worker's Compensation cases. Click the link below to watch the short video of his presentation!   Click Here to Watch Video! www.whitehousellc.com

COVID will not stop us providing unique settlement solutions using structured settlement annuities!

I hope that you are doing well! We just FINALLY completed the settlement of a case for a minor (age 17) that we were initially engaged by our plaintiff attorney client in February 2021, to provide structured settlement annuity quotes! Although the claimant was very close to the age of majority the key to the case was not giving him all of the settlement proceeds, which was over $120,000, at age 18. Having been in this business for over 20 years I cannot tell you the number of sad cases we have witnessed where the young claimant receives their settlement proceeds at age 18 only to blow through all the funds before anyone can blink and make bad decisions with the proceeds! This case involved two liability insurance carriers Liberty Mutual and Member Select. We coordinated multiple rounds of document revisions and had to have a separate set of different documents for each insurance carrier. In addition, one of the carriers would not fund the annuity until we had a fully executed court ord