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There is more than one type of individual retirement account (IRA). In this episode, we focus on the different types, including Traditional, Roth, SEP, SIMPLE IRAs, and spousal IRAs.
We explore each type's tax advantages, eligibility, and implications, especially for individuals with cross-border considerations.
The conversation also covers important aspects such as distributions, rollovers, conversions, and the significance of consulting financial and tax advisors for personalized advice.
A Few Takeaways
An IRA is a tax-advantaged investment tool for retirement savings.
Traditional IRAs allow for tax-deductible contributions under certain conditions.
Roth IRAs are funded with after-tax dollars, allowing for tax-free growth.
Cross-border implications are crucial for those on work visas.
Consulting both financial planners and tax advisors is essential for effective retirement planning.
Withdrawals from traditional IRAs are taxed as ordinary income.
Tune in for the rest of the details.
Episode Links & Resources
Are you Tax-compliant With Your Overseas Assets? - Free Guide - Scroll to the bottom of the page.
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The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Jane Mepham, CFP® (00:00:00)
⁓ And we're back with another episode of the International Money Cafe Podcast. In today's episode, we're going to do one of our more favorite formats. This is what we call a Shortie. And in 10 minutes or less, what we do is we take a term used in the cross border space ⁓ and give it to you, kind of define it for you at a very high level. In today's episode,
We're going to talk about IRAs, Individual Retirement Account. Now there are very many types of IRAs. There's a SIMPLE IRA, there's a SEP IRA, there's a Roth IRA, there's a traditional IRA. There's also custodial IRAs, but what we're going to do is sort of...
not talk about the custodial IRAs, but talk about the first four that we mentioned, because we've already addressed the custodial IRAs in a different episode and we'll actually make sure we've linked in the show notes to that. So you see all kinds of questions. What's an IRA account? How does it work? Which one am I eligible for? So to help you in today's Shortie we're just going to take each one of these and see if we can give you like a really high broad.
definition and of course because of the group that we work with there are a few key points that we're going to talk about that applies to people who are let's say on work visas or expats or that kind of thing okay. So Manasa which one do you want to grab and start with?
Manasa Nadig, EA (00:01:33)
I will start with the traditional IRA Jane. But before we do that, ⁓ quick definition of what an individual retirement account is. It is a tax advantaged ⁓ investment tool that individuals use to earmark funds for retirement savings. So I think that definition is pretty plain in English. ⁓ So a traditional IRA ⁓ looks at retirement savings
outside an employer plan. This is always connected to an individual. There are deductible ⁓ and non-deductible traditional IRAs. ⁓ So for example, if you do not have a retirement plan at work, you can still contribute into a traditional IRA outside of work, and you can deduct an IRA if
You know, there is, well, there are no income limits. If you ⁓ don't have a retirement plan at work, you can make a deductible IRA contribution. Some of the contributions though might factor in the taxpayer's income, their tax filing status, and a whole lot of other things. The key thing to remember is that it is tax advantaged.
which means that the investments within the traditional IRA ⁓ grow tax deferred until the withdrawals begin, which is typically after you've reached the age of 59 and a half. And when they do, they're taxed as ordinary income. So that ⁓ is about the traditional IRA, Jane.
Jane Mepham, CFP® (00:03:27)
Fantastic. Okay. Let me jump into the other one that we all talk about that we get a lot of questions about a Roth IRA. The thing you typically tend to see a lot of is everybody says you should do a Roth IRA, but we're like, uh-uh, not everybody should be doing a Roth IRA. But one of the kind of interesting things about this is that this was started in 1999.
which is actually before Manasa. Actually, this was, that was started after Manasa and I came to the US. So just kind of something fun to keep in mind. So the thing with the Roth IRAs is you contribute to this account ⁓ after tax. So that means what's going in has already been taxed, but the money grows tax free and it comes out tax free.
as you've kind of sort of alluded to at 59 and a half. But of course, there's a couple of other conditions around that. Now, the one thing we do want to caution everybody about, we know they're good, but they're not ideal for everybody. If you're on a work visa and we have a lot of folks that we work with that on these work visas ⁓ and you're going to retire overseas, you need to kind of check to see how your country will treat
the Roth IRA, right? Because the Roth IRA, it's tough, advantaged within the US IRS code, but not necessarily in other countries' pension system. So that's something we always caution you about because we know, sure, it's a great account, but it's something you definitely want to keep in mind as you start looking into this. ⁓ Anything else you want to add to that part of it, Manasa?
Manasa Nadig, EA (00:05:19)
Yeah, that ⁓ actually is a great point, Jane. And in fact, that is the reason why we always advise that you should have your financial planner talking to your tax advisor. And hopefully, are both, these professionals are aware of cross-border implications of things. ⁓ And you know what, ⁓ why we say this is,
Usually the contribution information from the IRS does not come out till May of the year, which is after you've filed your tax returns. ⁓ And then that might be ⁓ too late then to change what you can do because these contributions have to be made before the tax deadline, which is usually April 15th, right? ⁓ So that's definitely, ⁓ you know, have your financial planner talk to your tax advisor. That's a good idea.
Jane Mepham, CFP® (00:06:07)
Yeah.
Jane Mepham, CFP® (00:06:15)
I love it. ⁓ And one more thing I actually want to add about the Roth is as we said, it's based on earned income. So earned income means wages, say salaries, commissions, tips, bonus, ⁓ or net income from self-employment. The reason I put this out, because I've had folks say, okay, I'm not employed, but I have a rental property. Can I use that money to open a Roth? If that's my only source of income. Uh-uh.
you really cannot do a Roth based on that. Now in terms of income limits for contribution, this is based on what's called your modified adjusted gross income. In 2025, ⁓ this needs to be less than 150K if you're single. And if you're married filing jointly, the number is 236K. Now, if you're over the limit, we do have the option of doing what's called the backdoor Roth.
which it's a fantastic process. You get it. If you get it, but we've kind of seen people making mistakes on this. So you want to be careful about that. We actually have an upcoming episode where we talk a lot about backdoor Roth's and how you go about doing it. Now we've talked about the income limit for the contribution. One more thing I want to add is the max contribution that you can make to all your IRAs.
is 7,000. So if you do the traditional and you do the ROTH, assuming you're able to, you cannot contribute more than 7,000 in both accounts. But of course, if you're over 50, you do have an extra 1,000 that ⁓ you can put into it. ⁓ And I think with that, I've addressed the main points Manasa which are the ones you want to talk about.
Manasa Nadig, EA (00:08:07)
Well, you know, since we are going to be so close to 10 minutes, ⁓ but I just really need to briefly mention there are also ⁓ SEP IRAs, which actually stands for Simplified Employee Pension IRAs. And there is a SIMPLE IRA, which is a savings incentive match plan for employees. ⁓ these are ⁓ IRAs which are
other than the ⁓ ones we just mentioned. ⁓ Basically, a SEP IRA is something that can be designed for self-employed individuals or small businesses. ⁓ And a SIMPLE IRA is ⁓ similar to that, except that that can also be offered to employees of these small businesses. ⁓ So ⁓ those are the two. I'm just going to put that out there. They are like an Amp'ed up traditional IRA, so to speak.
And then we can always come back to it later in a different episode. Yes.
Jane Mepham, CFP® (00:09:02)
I like it. ⁓ Yeah, yeah, yeah. Okay, okay. I like it. ⁓ And do you want to just go straight into distributions? Like when you're ready to take the money out? Yeah, yeah.
Manasa Nadig, EA (00:09:12)
Yes. Yeah, yeah, yeah, for sure. So with a traditional IRA or even a SEP or a SIMPLE IRA, because the contributions have been given a tax deduction at the time, the withdrawals of these ⁓ are taxed as ordinary income ⁓ in whatever tax bracket you happen to be at the time you start taking these withdrawals out. ⁓ So
Having said that, when we are looking at this in a cross border context, ⁓ now, you know, we always talk about this mostly to our clients who most of them have cross border implications. ⁓ Anyone can contribute to these IRAs. That is not the issue. The issue here is where you may be when you turn 59 and a half,
or when you need to take these contributions out. ⁓ So if you are going to leave the US down the line, then some of these ⁓ may become tax, ⁓ or they may lose their tax advantage, ⁓ to put it more simply. So take a big picture into account. ⁓
and think about what will happen when you take the money out. And if there is no tax treaty in the country you are in at that time with the US, then possibly there could be a 30 % tax withholding. ⁓ And then real quickly addressing early distributions. We spoke about age 59 and a half, distributions made or money taken out of these IRAs before you turn 59 and a half
will be subject to additional 10 % tax. ⁓ And there are some exceptions that can be made to that 10 % penalty, ⁓ but those are far in between and for special reasons. ⁓ the additional tax is usually payable when you file your tax return, ⁓ and that is something that you would calculate then.
Manasa Nadig, EA (00:11:29)
Also, you may owe another excise tax if you ⁓ do not begin to take some minimum distributions when you turn ⁓ of that age right now, it is 73. ⁓ So ⁓ no required minimum distributions or early distributions ⁓ may trigger penalties. That's what the early distributions are. So that's a little bit about that, ⁓
Jane Mepham, CFP® (00:11:57)
Yeah, the good thing or well, maybe not so much the good thing, but in comparison, ⁓ a Roth IRA does not have a minimum required distribution simply because you already paid taxes and the account grows tax free, right? Now you can withdraw your contributions at any point. Now, as far as the earnings are concerned, if you're 59 and a half, you're right. You can take the money, not penalties, but
Manasa Nadig, EA (00:12:14)
Mm-hmm.
Jane Mepham, CFP® (00:12:26)
there's a whole lot of other, what we call the five year rule options that apply when it comes to these both IRAs in terms of who gets penalized, who pays for taxes. And so this is actually a whole new episode that's coming up ⁓ in a little while. ⁓ And ⁓ anything ⁓ else you want to add to this? I know now we're kind of like, okay, we're rushing into this.
Manasa Nadig, EA (00:12:53)
No, but what I really would always want to emphasize is talk to a cross-border tax or a financial advisor, you know, and really hash out what the implications of this would be ⁓ in the country where you would be going to. Yes. ⁓ But then ⁓ coming back to ⁓ the IRA, let's talk a little bit about rollovers. ⁓ And what is a rollover really is when ⁓
Jane Mepham, CFP® (00:13:10)
Okay, okay.
Manasa Nadig, EA (00:13:23)
you ⁓ literally take the money from one ⁓ individual retirement account and put it into another one. ⁓ So you ⁓ can make these rollovers. However, again, there are rules to it. ⁓ Now, ⁓ there is a 60 day rule, which means that, ⁓ you know, you can only make. Wait. What's a 60 day rule?
Jane Mepham, CFP® (00:13:52)
or the 60 day rule means you take money out of ⁓ the ⁓ IRA and then you have to put it into another IRA. Otherwise that's considered to be a distribution and you're taxed on it. That's exactly what it means. ⁓ yeah.
Manasa Nadig, EA (00:13:58)
or it has to be made within 60 days.
Manasa Nadig, EA (00:14:09)
Okay, okay. All right. So that's the 60 day rule, folks. ⁓
Jane Mepham, CFP® (00:14:17)
⁓ What about conversions? You want to say something about that?
Manasa Nadig, EA (00:14:21)
Yes. ⁓ Well, before we talk about the 60, you know, move over to the conversions, there is the 12 month rule as well, which is you cannot make more than one rollover ⁓ in ⁓ one year. ⁓ There is an exception to these rollover rules or as always, there's, ⁓ you know, a trustee to trustee transfer ⁓ or a conversion from an IRA to a Roth IRA.
they don't come under these rollover rules. But yes, conversions. Conversions are allowed from traditional IRAs to Roth IRAs. However, the Tax Cuts and Jobs Act that was passed in 2017 made them irreversible. So if you change your mind, you're out of luck. ⁓ And then ⁓ the funds transferred from the Roth IRA ⁓
may be reported as taxable income for the year. ⁓ I'm sorry, the funds transferred to the Roth IRA may be reported as taxable income for the year. And then cash needs to be brought to the table to pay these taxes. ⁓ So that was about distributions. ⁓ sorry. ⁓
Jane Mepham, CFP® (00:15:42)
distributions and conversions. So ⁓ a few other additional points about IRAs, there's something called a spousal IRA. ⁓ And a spousal IRA can be traditional, can be wrong. The key thing is this is where you have a married couple. ⁓ One person is not working so they don't have an income. And so the contributions and the characteristics of the IRA account at that.
point is based on the other spouse's taxable income. And then we already mentioned or alluded to the backdoor Roth IRAs, which are very popular with hyenas who are not eligible for regular IRA contributions. ⁓ Now, one last thing, I you talked about the contributions and the conversions. It's really, really important that you keep track of your cost basis of these contributions. And the easiest way to do that
Anytime you make an IRA contribution, ⁓ make sure your tax person reported on the form 86 or six. And that's how you keep basis throughout the year. ⁓ And with that, I think we'll come to the end, unless Manasa says anything else you want to add to this, so we're good to go.
Manasa Nadig, EA (00:17:01)
Now this is good, ⁓ we can wrap it up here. ⁓ Folks, remember we have a newsletter that we send out to our subscribers. ⁓ And if you want to be part of that elite list, go to the website and subscribe. ⁓ And ⁓ all of the references that we mentioned in our episode will be on the newsletter. Thank you for listening, bye.