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Duration: 8:47

Instructor:

Contributor: Interactive Brokers

Level: Beginner

The main topics of this lesson are: Roth IRAs and Roth 401Ks; Traditional and SEP IRAs; and Charitable Option. For this lesson refer to the Study Notes and watch the video for a synopsis.

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Study Notes:

Roth IRAs and Roth 401Ks

In general, owners of IRAs do not generate taxable income on growth, dividends, interest, or capital
gains in the account. This is true for the entire IRA “family”. Purposely, I am going to dispense with Roth
IRAs and Roth 401Ks first. Since only after-tax contributions have been made, and assuming the 5-year
time limit from the funding of the Roth IRA has been met, any distributions after age 59.5 are not
taxable. Unlike traditional IRAs, there is no Required Minimum Distribution (RMD) at age 70.5 from
Roth IRAs. Roth 401Ks may be rolled over into a Roth IRA at retirement, and again distributions are not
taxable.

Beneficiaries are not taxed on Roth IRA distributions after the death of the owner and the 5-year time
limit for funding is waived. The inherited Roth IRA must be fully distributed by the end of the fifth year
following the death of the owner.

Traditional and SEP IRAs

Traditional and SEP IRAs do not generate taxable income to the owners as long as funds are held in the
account. Distributions must begin at age 70.5. RMDs are taxable as income to the owner when
received. Distributions are allowed after age 59.5 without penalty and are taxable. Distributions before
age 59.5 that were not taken in accordance with a hardship exception are subject to both income tax
and a 10% tax penalty.

There is a common misconception that 100% of all traditional IRA distributions are taxable, however this
is often not true. If after-tax funds (money on which taxes have already been paid) are contributed to a
traditional IRA, then the IRA has basis and the distribution is only partially taxable.

As after-tax contributions are made to a traditional IRA, they should be recorded on form 8606 in the
contributor’s 1040. This form “tracks” the basis so that when distributions are made a calculation of the
taxable portion can be made.

Charitable Option

Another opportunity exists for those over 70.5 to avoid taxation on IRA (and SEP) distributions. An IRA
owner can choose to contribute up to $100,000 in RMD to a charity of their choice (or multiple charities)
annually in lieu of taking the RMD. The distribution must be made directly to the charity from the
custodian. No income tax is due on the amount given to the charity (likewise no charitable deduction is
allowed).

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Supporting documentation for any claims and statistical information will be provided upon request.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Tax-Related Circular 230 Notice

The information in this presentation is provided for informational purposes only, and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.

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