Ep 38: What Is English For "IRA's"?
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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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Speaker 1 (00:06):
Welcome to the International Money Cafe podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host Jen, me from Certified Financial Planner, founder and owner of Elgon Financial Advisors.
Speaker 2 (00:21):
And I'm your host, man, Nadi, enrolled agent, owner and founder of M and Tax and Business Services. Join us on this journey as we explore the unique challenges faced by inbound outbound families and businesses on taxes, compliance and financial planning. Let's get to the show
Speaker 1 (00:43):
And we are back with another episode of the International Money Cafe podcast. In today's episode, we are going to do one of for more favorite formats. This is what we call a shorty. 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 accounts. There are very many types of IRAs, these simple IRA, there's a SIA, there's a Roth, I a, there's a traditional IRA, the source of custodial IRAs. But what we're going to do is sort of not talk about the custodial IRA but talk about the first four that we mentioned because we've already addressed the custodial IRS in a different episode and we'll actually make sure we link in the show notes to that.
Speaker 1 (01:40):
So you see all kinds of questions. What's an IRA account? How does it work? Which one 1:00 AM I eligible for? So to help you in today's shorty, we are just gonna take each one of these and see 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 are going to talk about that applies to people who are, let's say, on work visas or experts or that kind of thing. Okay, Manasa, which one do you wanna grab and start with?
Speaker 2 (02:11):
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. I think that definition is pre plain in English. 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. For example, if you do not have a retirement plan work, you can still contribute into a traditional IRA outside of work and you can deduct an IRA. 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 draws begin, which is typically after you've reached the age of 59 and a half. And when they do their tax is ordinary income that is about the traditional IR Jane.
Speaker 1 (03:55):
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 Uhuh. Not everybody should be doing a Roth IRA, but one of the kind of interesting things about this is that it was started in 1999, which is actually before man actually they was started after man and I came to the us so just kind of something fun to keep in mind. 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 sort of alluded to at 59 and a half. But of course there's a couple other conditions around that.
Speaker 1 (04:56):
Now the one thing we do wanna caution everybody about, we know they're good but they're not ideal for everybody. If you are on a work visa and we have a lot of folks that we work with that on this work visas and you are going to retire overseas, you need to kind of check to see how your country would treat the Roth IRA because the Roth IRA, it's tax advantaged within the US IRS code but not necessarily in other countries pension system. So that's something we always caution you about 'cause we know sure it's a great account but it's something you definitely wanna keep in mind as you start looking into this. Anything else you wanna add to that part of it, man?
Speaker 2 (05:44):
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 they're 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 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? Have your financial planner talk to your tax advisor. That's a good idea.
Speaker 1 (06:34):
I love it. One more thing I actually wanna add about the Roth is as we said, it's based on earned income. So earned income means wages, let's say salaries, commissions, tips, bonus or net income from self-employment. The reason I put this out, 'cause 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, Uhuh, 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 150 K if you're single and if you're married filing jointly, the number is 236 K. If you are over the limit, we do have the option of doing what's called the backdoor Roth, which it's a fantastic process if you get it, but we've kind of seen people making mistakes on this.
Speaker 1 (07:37):
So you wanna be careful about that. We actually have an upcoming episode where we talk a lot about uh, backdoor roths and how you go about doing it. We've talked about the income limit for the contribution. One more thing I wanna add is the marks contribution that you can make to all your IRAs is 7,000. So if you do the traditional and you do the raw, assuming you are 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 1000 that you can put into it. And I think with that I've addressed the main points manasa, which are the one you want to talk about.
Speaker 2 (08:22):
Well, 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 lsep IRAs, 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. Those are the two, I'm just gonna put that out there. They are like an amped up traditional IRAs so to speak. And then we can always come back to it later. Yeah, in a different episode. Yes.
Speaker 1 (09:16):
Okay. Okay. I like it. And do you wanna just go straight into distributions? Yes. Which already take the money out? Yeah,
Speaker 2 (09:23):
Yeah, yeah, yeah, for sure. With a traditional IRA or even a separate 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. 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 are 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 lose their tax advantage. To put it more simply, take a big picture into your account, think about what will happen when you take the money out.
Speaker 2 (10:35):
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 and in between and for special reasons. And the additional tax is usually payable when you file your tax return and that is something that you would calculate. Then also you may owe another excise tax if you do not begin to take some minimum distributions when turn of that age. Right now it is 73 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.
Speaker 1 (11:49):
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 gross tax free, right? Mm-hmm <affirmative> now you can withdraw your contributions at any point as far as the earnings are concerned. If you're 59 and a half, you're right, you can take the money all penalties. But there's a whole lot of other, what we call the five year rule options that apply when it comes to these Roth IRAs in terms of who gets penalized, who pays for taxes. This is actually a whole new episode that's coming up in a little while. And anything else you wanna add to this? I know now we are kind of like, okay, we're rushing into this <laugh>.
Speaker 2 (12:42):
No, but what I really would always want to emphasize is talk to a cross border tax or a financial advisor and really hash out what the implications of this would be in the country where you would be going to. Yes, okay. But then coming back to the IRA, let's talk a little bit about rollovers and what is a rollover really is when you literally take the money from one individual retirement account and put it into another one, you can make these rollovers. However, again, there are rules to it. Now there is a 60 day rule, which means that you can only make, wait, what's a 60 day rule?
Speaker 1 (13:31):
Oh, the 60 day rule means you take money out of it ira, it has
Speaker 2 (13:36):
To be made within 60 days
Speaker 1 (13:38):
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.
Speaker 2 (13:47):
Okay. Okay. Alright, so that's the 60 day rule folks.
Speaker 1 (13:51):
<laugh>, what about conversions? You wanna say something about that?
Speaker 2 (13:56):
Yes. Well, before we 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 is always there's 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 in jobs act that was passed in 2017 made them irreversible. So if you change your mind, you are 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 trans may be reported as taxable income for the year. And then cash needs to be brought to the table to pay these taxes.
Speaker 1 (15:01):
A few other additional points about IRAs, there's something called a spousal IRA and a spousal IRA can be traditional, it 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 the own income and 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 high earns who are not eligible for regular IRA contributions. One last thing, I know 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 reports it 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 Mana, is there anything else you wanna add to this or we good to go?
Speaker 2 (16:15):
No, this is good. We can wrap it up here. Uh, 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 bye.
Speaker 3 (16:40):
Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross order finances and tax needs