Frequently Asked Questions
We’ve developed the following Q&A sections to help answer your questions about Section 529 Plans and Individual Retirement Accounts (IRAs). To ask a question not listed below, e-mail us using the form on our Contact Us page.
Section 529 Plans
- What is a 529 Plan?
- Are all 529 plans the same?
- Who can open a 529 account?
- Do I need to open a separate account for each of my children?
- What happens if I do not use the money for education?
IRAs
- What is a traditional IRA?
- What is a Roth IRA?
- How much can I contribute?
- When will I be required to take withdrawals?
- What happens if I withdraw my money before age 59 1/2?
IRA Rollovers
- What is a Rollover IRA?
- What are the different types of IRAs?
- How do Rollover IRAs help me avoid paying taxes on my distribution?
- Can I move an existing IRA from another institution to Sentinel?
- Can I just reinvest the check the company sends me?
- I already received a check made payable to me -- and 20% was withheld. If I reinvest my money now, can I get that 20% back?
- Can I roll over all the money in my retirement plan account to a Rollover IRA?
- How is a Rollover IRA different from a Rollover Annuity?
- What if I need my retirement money to pay expenses?
- What should I do with my after-tax contributions?
- Can I add more money to my Rollover IRA later?
- I might be changing jobs soon. What are my options for the money in my account?
- Can I leave my investments in my current plan indefinitely?
- What is a MRD?
529 Plan Answers
A. 529 refers to Section 529 of the Internal Revenue Code. 529 plans are tax-advantaged programs that help families save for college. Residents of any state can invest in any state's 529 Plan, you do not have to be a resident of a particular state to invest in that state's plan. There are three types of 529 plans:
Q. Are all 529 plans the same?
A. 529 Plans vary in a number of ways, including contribution limits to the account (defined by the states), fees to open and maintain an account, in-state tax treatments such as a state tax deduction, investment options offered, and the financial services company that manages the plan. There may also be other differences, such as special programs or benefits defined by the particular plan.
Before investing in a 529 plan, you should consider whether the state you or your designated beneficiary reside in or have taxable income in has a 529 plan that offers favorable state income tax or other benefits that are only available if you invest in that state's 529 plan.
Q. Who can open a 529 account?
A. Anyone of legal age with a valid social security number or federal taxpayer identification number who is a US citizen or resident alien can open an account. A state-sponsored program does not require the owner to reside in the state where the plan is maintained. An account can only be opened in one name - you can not have a "Joint" account with your spouse.
Q. Do I need to open a separate account for each of my children?
A. Yes. Each account may have only one beneficiary, but you can open accounts for as many beneficiaries as you would like.
Q. What happens if I do not use the money for education?
A. The money may be withdrawn for non-education purposes, but the earnings portion of this money will be subject to a penalty and will be taxed at the account owner's income tax rate. The gain on non-qualified withdrawals (i.e. not used to pay qualified higher education expenses) will be subject to federal income tax and a 10% federal penalty. The gains on withdrawals due to death, disability or scholarship of the beneficiary are subject to federal income tax, but not the penalty. Gains on non-qualified withdrawals not on account of death, disability or scholarship will be subject to federal income tax and a 10% federal penalty.
IRA Answers
A. An Individual Retirement Account is a tax favored vehicle designed to allow you to save for retirement. In a traditional IRA you can make deductible contributions which will grow with no tax payments until you withdraw the money.
A. A Roth IRA is a tax favored vehicle that you contribute to for retirement. In a ROTH IRA the contributions are not deductible; but, the earnings are not taxed. The earnings will be taxed if you withdraw the money before age 59 1/2 or if you have the Roth account for less than 5 years.
A. You can contribute up to the lesser of $4,000 or 100% of your annual earnings. A non-working spouse may also contribute up to $3,000, if your joint income equals or exceeds the amount you both contribute. Additional "catch-up" contributions are available to those over 50 years of age. If you participate in a company sponsored retirement plan, you may not be able to deduct your contribution.
Q. When will I be required to take withdrawals?
A. In a Traditional IRA, you are required by law to begin taking distributions from your IRA in the year you reach age 70½. The amount of the distribution is based on your age and the value of your account. Internal Revenue Service Publication 590 provides the information to calculate the minimum distribution
Q. What happens if I withdraw my money before age 59 1/2?
A. An early withdrawal is generally one taken before age 59½ in a Traditional IRA or within the first five years of a Roth IRA. In addition to the amount added to your income, the IRS may assess an additional 10% penalty. You should consult with your tax advisor regarding the tax consequences.
IRA Rollover Answers
A. The Rollover IRA is a type of Individual Retirement Account designed for people who are leaving a job or retiring and receiving money accumulated in an employer-sponsored retirement plan. Eligible distributions from such plans may be "rolled over" directly into a Fidelity Rollover IRA. A direct rollover allows you to avoid the mandatory 20% withholding for federal income tax, to avoid possible penalties for early withdrawal, and to continue deferring income tax.
Rollover IRA can be invested in mutual funds, stocks, bonds, or other securities, including CDs and treasuries. This flexibility makes opening a Rollover IRA a good opportunity to rebalance your retirement portfolio, by rolling your savings into instruments not traditionally offered by employer plans.
Q. What are the different types of IRAs?
A. Traditional IRA. The Traditional IRA allows individuals to make an annual contribution up to specified maximum limits. Any earnings in the IRA can grow tax-deferred, meaning that you do not pay current tax on any account earnings until you take the money out.
Traditional IRAs can help make it easier to maximize your retirement savings by allowing any money you earn on your IRA contributions to grow free from taxes within your account until withdrawn. When your earnings aren't eroded by taxes year after year, they can compound faster. Distributions from Traditional IRAs are included in income at the time of withdrawal and may be subject to a 10% early withdrawal penalty if you are under age 59 1/2. As an incentive to contribute to Traditional IRAs, Congress allows some people to deduct their Traditional IRA contributions from their current income taxes. Use the IRA Evaluator to determine if you qualify for a tax-deductible IRA contribution. For more information, see "Understanding the Benefits of IRAs."
The Roth IRA. As long as your income doesn't exceed a certain level you can contribute to a Roth IRA. Any earnings in the IRA can grow tax-free.
Although you can't deduct contributions to a Roth IRA, you can benefit from its other valuable tax advantages. You won't owe any taxes or penalties on the assets you withdraw from a Roth IRA as long as you have met specific requirements. Funds from a Roth IRA can be withdrawn penalty free prior to age 59 1/2 for a first time home purchase (up to a lifetime limit of $10,000) or qualified educational expenses. You can choose to contribute both to a Traditional IRA and a Roth IRA in the same tax year, but your combined contributions to all your IRAs cannot exceed the annual maximum limit in total. Read more about selecting an IRA.
Rollover IRA. If you retire or change jobs, you may be eligible for a distribution from your employer's retirement plan. A Rollover IRA is designed to help you avoid mandatory withholding of 20% and preserve the tax-deferred status of this distribution of eligible assets. See "What is a Rollover IRA?" for more information. If you have been given a distribution check directly you may want to review "I already received a check made payable to me and 20% was withheld. If I reinvest my money now, can I get that 20% back?"
Spousal IRA. While it's not actually called a "Spousal IRA," non-wage earning spouses can contribute up to a $2,000, for the 2001 tax year, to their own Roth IRA or Traditional IRA provided the other spouse qualifies and the couple files a joint federal income tax return. This IRA contribution is in addition to any IRA contribution the wage-earning spouse makes, meaning eligible married couples could contribute up to a combined total of $4,000, for the 2001 tax year, to contributory IRAs each year. Beginning with the 2002 tax year, married couples will be able to contribute up to the new limits to each spouse's IRA, even if one is a non-working spouse, provided combined contributions do not exceed combined compensation. Read more about the new maximum annual contributions.
Q. How do Rollover IRAs help me avoid paying taxes on my distribution?
A. Rolling over your eligible distribution directly to a Rollover IRA allows you to avoid a possible 10% early withdrawal penalty, mandatory 20% withholding for federal income taxes, and to postpone paying taxes on the amount rolled over until it is withdrawn from your IRA. It also lets your eligible rollover assets continue to accumulate any earnings on a tax-deferred basis.
If you want to avoid the 20% mandatory withholding for federal income taxes at the time of distribution from your employer's plan, make sure that you directly roll over your eligible distribution into a Rollover IRA or other eligible retirement plan. You may want to hold Rollover IRA funds separately from your Traditional IRA assets to facilitate the possibility of investing your Rollover IRA assets in another employer-sponsored plan in the future.
Q. Can I move an existing IRA from another institution to Sentinel?
A. Yes. There are two methods.
Direct (custodian-to-custodian) Transfer. By completing a Sentinel Securities IRA Transfer Form in addition to an SSi IRA Application, you can authorize Sentinel to transfer your IRA from the other institution to a Sentinel IRA.
Sixty-day Rollover. You can withdraw your IRA from the other institution and reinvest it in a Sentinel IRA. You must complete the rollover within 60 days of receiving the withdrawal to avoid income taxes and, if you are under age 59 1/2, the 10% IRS early-withdrawal penalty. Only one rollover is allowed per IRA in any 12-month period.
Q. Can I just reinvest the check the company sends me?
A. You can. But remember, if your company plan makes the check payable to you, 20% of your eligible retirement plan distribution will be withheld for federal income taxes. The only way to avoid this withholding is to have your current employer make your distribution check payable to the financial institution you've chosen as custodian for your new rollover plan. Either you or your current employer should then send this check directly to the financial institution.
Q. I already received a check made payable to me -- and 20% was withheld. If I reinvest my money now, can I get that 20% back?
A. Yes, but first you'll have to replace the 20% that was withheld with your own savings. Then you'll have to reinvest this 20% along with the 80% you already received -- all within 60 days of receiving the distribution. If you do, you can receive credit for the 20% that was withheld toward your income tax liability when you file your tax return. However, if you don't have the cash to make up for the 20% withheld, the IRS will consider that 20% as a distribution, making it subject to taxes and a possible 10% early withdrawal penalty.
Q. Can I roll over all the money in my retirement plan account to a Rollover IRA?
A. Once you have terminated employment with the sponsor of your retirement plan, you can roll over all the contributions made to your plan and any earnings on those contributions that haven't yet been taxed -- referred to as pre-tax contributions.
If you made contributions to your plan with income that had already been taxed -- referred to as after-tax contributions, you will be able to roll over those assets as well.
To determine how much of your contributions and earnings were "pre-tax" versus "after-tax," review the statements you received, or ask your current employer's Benefits Office for assistance.
Q. How is a Rollover IRA different from a Rollover Annuity?
A. The main differences are the investment choices they offer and their cost. You can fund a Rollover IRA with almost any type of investment -- from CDs and mutual funds to stocks and bonds.
With a Rollover Annuity, the investment choices depend on which type of annuity you select. A fixed annuity offers you a guaranteed, fixed rate of return. A variable annuity allows you to allocate assets in variable investment options.
A Rollover Variable Annuity also may cost more than a Rollover IRA. That's because you're paying for the two additional benefits most annuities offer: a guaranteed death benefit and a guaranteed income for life, which are subject to the claims paying ability of the issuing insurance company.
Q. What if I need my retirement money to pay expenses?
A. Your best bet may still be to roll your retirement plan money into a Rollover IRA now. If you do need money to pay expenses later, you can always withdraw just what you need -- when you need it. And there's no automatic 20% withholding on withdrawals from a Rollover IRA. Remember, however, that the withdrawal from the IRA is subject to ordinary income tax and may be subject to a 10% early withdrawal penalty. There may be some situations, however, which would cause the distribution to be eligible for special tax treatment. Ask your tax advisor about income averaging.
Q. What should I do with my after-tax contributions?
A. While you can't currently roll over these contributions directly into a Rollover IRA, you can still invest them in a non-retirement account so they can continue to earn more money for your retirement. For example, you can invest any after-tax contributions into a variety of mutual funds. To keep this money growing tax-deferred, you may want to consider a fixed or variable annuity.
Q. Can I add more money to my Rollover IRA later?
A. Yes. You can add additional money to your Rollover IRA -- currently, in order to avoid commingling, this money must also be an eligible distribution from another qualified retirement plan. For example, a lump sum distribution from a corporate pension plan can be added to a Rollover IRA that was set up with assets rolled over from a 401(k) plan. However, we recommend that you maintain assets from unlike sources in separate accounts for tracking purposes. For example, assets rolled over from a 401(k) plan should be held in a separate account than assets in a 403(b) plan. This will simplify the process if you decide to move these assets into another employer-sponsored plan in the future.
Q. I might be changing jobs soon. What are my options for the money in my account?
A. One of the reasons why company retirement plans like 401(k)s have become so popular is that they are portable: generally speaking, you can take your retirement assets from job to job (with some exceptions). If you decide to change jobs, you generally have three options for your money:
If you have more than $5,000 invested in your account you can leave your money in your current retirement plan account generally until age 70 1/2. (Please consult your plan for your specific options.)
You can also directly roll your eligible money over to another retirement plan (if the plan allows) or to an Individual Retirement Account (IRA). A Rollover IRA (also known as a "conduit IRA") is designed to give you a way to move eligible retirement money directly from your former employer's plan to an IRA and then into another employer's plan. As long as you elect to directly rollover your entire eligible balance, you do not have to pay the 20 percent mandatory federal income tax withholding or the 10 percent early withdrawal penalty if you are under age 59 1/2. "Direct rollover" means that you have your current employer make the withdrawal check payable to your IRA's custodian or to your new employer's plan trustee on your behalf, instead of having the check made payable to you.
Your third option would be to take a full or partial withdrawal payable to you (instead of rolling it over). This option has many tax implications. For any portion that you do not directly roll over (by having the check made payable to your IRA or next employer's plan), 20 percent will be withheld for prepayment of your federal income tax. In some cases, if you are under age 59 1/2 there may be a 10 percent early withdrawal penalty.
You can only rollover pretax contributions and investment earnings to a Rollover IRA or a new employer's plan. However, under the tax legislation passed in 2001, after tax contributions will be eligible to be rolled into a Rollover IRA or into a new employer's plan (if the plan allows) beginning January 1, 2002. We recommend that after-tax balances be maintained in a separate Rollover IRA from pre-tax balances. This will simplify the process if you decide to rollover these assets into another employer-sponsored plan in the future.
Q. Can I leave my investments in my current plan indefinitely?
A. No. The federal government will allow you to put off paying taxes on this money only for so long. Generally, you must begin to take withdrawals no later than April 1 of the year following the year in which you turn age 70 1/2 or April 1st of the year following the year in which you retire, whichever is later. Of course, your company's plan may have different restrictions. Check with your benefits office.
A. MRD stands for "minimum required distribution." The federal government requires minimum distributions from an IRA (excluding the Roth IRA, for which MRDs are not required during the account owner's lifetime) to ensure that you actually use your IRA savings for retirement (and not, for example, to pass on to your beneficiaries). The IRS will only allow you to defer paying taxes on this money for so long. There are two dates to remember for MRDs. Your first MRD generally must be taken by April 1 of the year after the year in which you attain age 70 1/2. Subsequent withdrawals must be taken from your account at least once a year, on or before December 31.
If you do not take your total MRD each year, the Internal Revenue Service may impose a 50% penalty tax on the amount that should have been withdrawn in the calendar year. This penalty is in addition to regular income taxes.