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IRA – Frequently Asked Questions

Introduction to Individual Retirement Accounts

Here are some important questions and answers to help you start learning about Traditional and Roth IRAs, the most common types of Individual Retirement Accounts (IRAs). Before you start, see if you’re eligible to start using this tax-advantaged account to start saving for your retirement.

Top 5 Frequently Asked Questions

What is an IRA?

An Individual Retirement Account (IRA) is a type of savings account that is designed to help you save for retirement and offers many tax advantages. There are two different types of IRAs: Traditional and Roth IRAs.

What is the difference between a Traditional and Roth IRA?

The primary difference between a Traditional IRA and Roth IRA is the type of tax benefit each offers. With a Roth IRA, you get no deduction for contributions, but if you follow all the rules your investment earnings will be distributed tax- and penalty-free in retirement. Traditional IRAs can provide a deduction for contributions and you defer taxes on investment earnings until funds are withdrawn, typically in retirement. For more information about the two types of IRAs, including details about eligibility, visit the Traditional vs. Roth section of our IRA Center.

How do I open an IRA?

The first step in opening an IRA is to select the option that fits your individual investment style. It’s important to know that application instructions vary based on the type of investing style you choose. For additional details on bank or brokerage options, you can also call us at 1-877-493-4727.

What is my Modified Adjusted Gross Income (MAGI)?

Your Modified Adjusted Gross Income (MAGI) is an income tax term. It is your adjusted gross income (AGI) with certain deductions and exclusions added back. It's used to determine whether or not you’re allowed certain tax benefits like being able to deduct your Traditional IRA contribution or qualify to make a Roth IRA contribution. Need more information? Review IRS information on IRAs, IRS Publication 590-A, or contact your tax advisor.

Once I open my IRA, how should I invest the funds within my account?

You can choose from a full range of investments, including stocks, bonds, CDs and savings, Exchange-Traded Funds (ETFs), and mutual funds.

Whether you prefer to make your investment decisions independently, receive investment guidance, or leave all the decision-making to a team of professionals, we have a an option.

Contributing to an IRA

What is the annual contribution limit for an IRA?

If you are under age 50 you can contribute up to $5,500 in 2016 and 2017, and if you're age 50 or older, in a particular tax year, you can contribute an additional $1,000 catch-up contribution for a total of up to $6,500.

What are "catch-up" contributions?

Once you reach age 50, in a particular tax year, contribution limits on IRAs and employer-sponsored retirement accounts increase, allowing you to "catch up" on your savings by contributing an amount over the annual contribution limit. In 2016 and 2017, you can contribute to your IRA an additional $1,000 catch-up contribution, making your maximum contribution amount up to $6,500.

Can I contribute to both a Traditional and a Roth IRA in the same year?

Yes, you may make contributions to both a Traditional IRA and a Roth IRA in the same year, provided the combined total contribution does not exceed your contribution limit, or 100% of earned income, whichever is less, for the year, including any catch-up contributions. For example, in 2017, the total amount you can contribute to both a Traditional IRA and a Roth IRA combined cannot exceed $5,500 ($6,500 if age 50 or older).

Can I contribute to an IRA if I'm already contributing to a plan at work?

Yes, you can open and fund a Traditional or a Roth IRA even if you already contribute to an employer-sponsored retirement plan, helping you save more than you could in your plan at work alone. You may want to discuss this option with your tax advisor, however, since participation in an employer plan may impact deductibility in a Traditional IRA.

Withdrawing money from an IRA

What are the taxes and penalties for an early distribution from my IRA?

Taxable distributions from Traditional and Roth IRAs before age 59½ may be subject to an IRS 10% penalty tax. The exceptions to the 10% penalty are for age 59½, death, disability, eligible medical expenses, certain unemployed individuals' health insurance premiums, qualified first home buyer (lifetime maximum of $10,000), qualified higher education expenses, substantially equal periodic payments (SEPP), Roth conversions, qualified reservist distribution or IRS levy.

Can I take a loan from my IRA?

No. Loans are not permitted from IRAs.

How do I request an IRA distribution?

To withdraw money (i.e., take a distribution) from your IRA, have your account number available and either visit your local branch or call us at the phone number listed on your IRA statement (to access your statement online,  sign on to Wells Fargo Online® and click the Statements and Documents tab).

Other important things to know about IRAs

What are some possible benefits of consolidating IRAs with Wells Fargo?

Consolidating your IRAs with us offers many potential benefits, including one monthly statement, required minimum distribution (RMD) simplification, potentially fewer fees, and ease in managing your investment strategy. To explore whether this approach is a good choice for you, or to learn more about how to transfer or consolidate IRA assets, call us at 1-877-493-4727 or request a retirement consultation

What is a Roth conversion?

A Roth conversion involves a transfer of assets from your Traditional IRA or employer-sponsored retirement plan, such as a 401(k), 403(b) or Government 457, into a Roth IRA. Converting before-tax money to a Roth IRA triggers a taxable event; you will not owe tax on any after-tax amount converted.  Subsequent investment earnings can be tax- and penalty-free if you maintain the account at least five years and take withdrawals after age 59 1/2, or for your disability, death or using the qualified first time home buyer exception. Learn more about converting to a Roth IRA.

What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees (SIMPLE) IRA allows employees and employers to contribute to an IRA based plan that is set up and designated as a SIMPLE IRA for employees' benefit. Under a SIMPLE IRA, employees can elect to defer a portion of their pay known as salary deferral or salary reduction contributions and the employer will make either a matching or non-elective contribution. All contributions, both employee and employer, must be deposited into a SIMPLE IRA for each employee.

What is a SEP IRA?

A Simplified Employee Pension (SEP) IRA provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account (IRA) set up for each plan participant (a SEP-IRA). A SEP-IRA account is a Traditional IRA and follows the same investment, distribution, and rollover rules as Traditional IRAs. Employers and employees can make both SEP IRA and Traditional IRA contributions to the same account.

What is an inherited IRA?

An Inherited IRA allows beneficiaries a way to keep the funds growing tax-advantaged in an IRA while taking distributions. The account titling will always refer to the deceased IRA owner with you listed as the beneficiary. Since you aren’t the owner, you may not make contributions and cannot execute a 60-day rollover to this account. The benefit of this arrangement is that you only need to take annual required minimum distributions (RMDs) based on your life expectancy and are taxed on that amount; this is often referred to as the stretch IRA strategy.

How do I update my IRA beneficiaries?

Your beneficiary designations generally determine who will inherit your IRA and supersede instructions in your will or trust. To update your beneficiaries, have your account number available and either visit your local branch or call us at the phone number listed on your IRA statement (to access your statement online, sign on to Wells Fargo Online and click the Statements and Documents tab).

What happens if I don't name beneficiaries or my beneficiary pre-deceases me?

While it is recommended that you review and update your beneficiaries listed on your retirement accounts, at any life event such as a birth, of a child or grandchild, death of a beneficiary, divorce, or marriage — that doesn’t always happen. Only if your named beneficiaries have predeceased you, disclaimed, or there is no valid beneficiary form on file, will the default provisions be used. The default beneficiaries on a Wells Fargo IRA are:

  • First, a surviving spouse
  • Second, surviving children (as defined under state law)
  • Third, the estate

Why is naming my estate my IRA beneficiary not the best option?

Having Estate listed as your IRA beneficiary may have impacts that could negatively affect your heirs as well as your overall Estate plan. These impacts may include the following:

  • Subject to probate - IRAs, which should be a non-probate asset, will become subject to probate and the related legal complications.
  • Limited distribution options - An Estate is not a “living” beneficiary, and therefore has no life expectancy, which generally means the heirs may lose the ability to take advantage of the stretch IRA strategy. Stretching an IRA simply refers to the ability to take required minimum distributions (RMDs) over the beneficiary’s single life expectancy (using the term-certain calculation method rather than over the life expectancy of the original IRA owner).
  • Tax implications - Distributions from the IRA to the Estate are usually taxed at the Estate federal income tax rate, which can be significantly higher than the tax rates to individual taxpayers.