IRAs

IRA options, inherited IRAs, RMDs, and more

Inherited IRAs

What is an inherited IRA?

An inherited IRA—also known as a beneficiary IRA—is an individual retirement account with tax advantages that’s left to one or more beneficiaries when the original owner of an IRA or employer-sponsored retirement plan passes away. Inherited IRAs can be left to anyone, including spouses, relatives, estates, and trusts. Tax Alert: The SECURE Act has recently made a number of significant changes to the rules surrounding inherited IRAs. The IRS is currently working on developing content related to ...

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Types of Inherited IRAs

Inherited IRAs have four possible types, as there are two tax-status types and two beneficiary types, each of which determine the treatment they will receive by the IRS and the rules they must follow: Traditional vs Roth, and Spousal vs Non-spousal. Inherited Traditional IRAs: All pre-tax accounts left to beneficiaries can be rolled into an inherited Traditional IRA. This includes SEP IRAs, Simple IRAs, Rollover IRAs, and Traditional 401(k)s, among others. Owners of an inherited Traditional IRA ...

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How do I roll over my inherited IRA?

You are able to transfer an inherited retirement plan to Betterment through a process called a trustee-to-trustee transfer. Your current provider will send us a check directly, for your benefit. We will assist you throughout the whole transfer and set up process, so if you’d like to get started, please email us at rollovers@betterment.com. In order to create your inherited IRA at Betterment, and generate the necessary transfer paperwork, include the following information in your email: Name of ...

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Special Considerations

There are few things to keep in mind when rolling over an inherited IRA to Betterment, as well as to other institutions. Required Minimum Distributions: At this time, Betterment does not automatically calculate RMDs for inherited IRAs, though we hope to provide this feature in the future. For customers who are on our Premium plan, our team of CERTIFIED FINANCIAL PLANNER® professionals can help you calculate this during one of your scheduled advice calls. Otherwise, you will need to calculate ...

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Tax Rules For Inherited IRAs

Tax rules for inherited IRAs are complicated, and they depend on the situation. For more information regarding contributions, distributions, and other matters, please consult a qualified tax professional or visit the IRS website for guidance. The SECURE Act has recently made a number of significant changes to the rules surrounding inherited IRAs. The IRS is currently working on developing content related to this change and their site should be updated soon.

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IRA tax withholding

How can I set up tax withholding?

When you initiate a distribution from your IRA, you will automatically be prompted to choose a state and/or federal tax withholding amount. All customers will be defaulted to 10% federal withholding, but can select 0% or any other value between 10% and 100%. Betterment is not a tax advisor, and the information provided here should not be construed as tax advice. It should only be used for informational purposes. Please consult a qualified tax professional to determine the rules that apply to ...

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Are there specific tax withholding rules by state?

State tax withholding rules on IRA distributions vary from state to state. State withholding applies (depending on the state) to both distributions and removals of excess contributions. States that have mandatory state tax withholding on distributions include: Arkansas, California, Connecticut, Delaware, Iowa, Kansas, Maine, Massachusetts, Michigan, North Carolina, Oklahoma,Oregon, Vermont, Washington D.C. While some “mandatory” states may have some special exceptions to withholding, Betterment ...

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Why would I choose to withhold more than the default 10% on federal withholding?

Customers commonly use the IRA withholding process to meet future tax obligations from other sources of income such as: capital gains, dividends, rental income, and self-employment income. Example: Bob is 62 and runs a consulting business. He withdraws $20,000 from his Roth IRA, which he opened when he was 50. He doesn’t owe any tax on this withdrawal because he is over age 59.5, and his account has been open for at least 5 years. Even though Bob’s Roth distribution is tax-free, he could still ...

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What is IRA tax withholding?

Tax withholding is the percentage of income tax that you elect to have withheld from your IRA distribution and sent directly to the IRS in an effort to mitigate your future tax liability. The amount you withhold, if any, may differ from your ultimate tax liability. If your withholding ends up being too much, you will be due a refund when you file your tax return. If your withholding ends up being too little, you will owe an additional amount to the government when you file your tax return. ...

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Is there a way to check my tax withholding history?

Yes, you can view records of previous tax withholdings on Activity. You will also receive a confirmation email that contains a breakdown of the amount withheld, including state vs. federal withholding, and the amount being sent to your linked bank account. A 1099-R tax form will also be generated by January 31 of the following year, which will show your IRA state and/or federal tax withholding total for the year. Betterment is not a tax advisor, and the information provided here should not be ...

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Is there a way to check the status of my tax withholding?

Pending transfers will be noted on Manage Transfers with both the amount withheld for the IRS and the amount going to the customer’s bank account. Once the transfer is complete, a record will be posted on Activity. Betterment is not a tax advisor, and the information provided here should not be construed as tax advice. It should only be used for informational purposes. Please consult a qualified tax professional to determine the rules that apply to your individual tax situation.

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Can I change my withholding percentage after I have submitted a withdrawal request?

No. Once the distribution has been requested, the election is final. If the withholding ends up being too much or too little, there will be a reconciliation when filing your tax return the following year. Betterment is not a tax advisor, and the information provided here should not be construed as tax advice. It should only be used for informational purposes. Please consult a qualified tax professional to determine the rules that apply to your individual tax situation.

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IRA transfers

How do I complete a Direct IRA Transfer?

If this is your first direct IRA transfer, don’t worry. We help process direct IRA transfers every day, and we’re here to make it as easy for you as possible. TABLE OF CONTENTS How to Transfer Indirect Rollovers Less Common Special Cases Glossary A direct transfer moves qualified assets directly from one provider to another. No tax consequences: Direct transfers are not counted as distributions or taxable income, therefore they are not subject to any taxes or penalties. No limit: The IRS says ...

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Managing my account

What To Do When You Over-Contribute to an IRA

Contributing to an IRA can be a great way to increase retirement savings, due to the special tax advantages these accounts offer. But the IRS isn’t prone to offering free-for-alls; IRAs have limits for how much an individual can contribute during a given calendar year. Current contribution limits for the maximum total contributions to traditional and Roth IRAs are limited to the lesser of: $6,000 ($7,000 if you’re age 50 or older), or your taxable compensation for the year. Note that this limit ...

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Required Minimum Distributions

Where can I find my required minimum distribution (RMD)?

You generally have to start taking required minimum distributions (RMDs) from your Traditional IRA account after you reach a certain age. Roth IRA accounts do not require withdrawals while you own them. You can find your RMD amount, if applicable, on your FMV or Form 5498 by clicking here. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

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What is a Required Minimum Distribution (RMD)?

Smart investors diligently save for decades to help ensure they are prepared for retirement. This includes taking advantage of tax-deferred accounts. These accounts, otherwise known as Traditional accounts, can provide two main benefits for investors. You will generally receive a tax break in the year that you contribute to the account. You will avoid having to pay taxes on investment income and capital gains while the funds are still in the account. While these tax breaks can be very ...

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How do I take my RMD?

Log in to your Betterment account. Select Transfer or Rollover in the top right corner of the page. Choose Withdraw and select an account. You will select your Traditional IRA (or SEP, Traditional inherited IRA, or Roth inherited IRA). Select that this is a one-time withdrawal. Select normal distribution as the distribution type. You will be asked to enter the amount you want to withdraw. At this point you want to be sure to enter your total RMD amount. Finally, you will be asked to select ...

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The 5-Year Rule for Required Minimum Distributions

There is a Roth IRA holding period of five years that determines whether you can take a qualified distribution without being taxed. This is sometimes called the 5-year rule. If the Roth 401(k) has been held for less than five years but the Roth IRA you’re rolling it into has been held for more than five years, then all of the funds now meet the five year requirement. If the Roth 401(k) has been held for more than five years but the Roth IRA you’re rolling it into has been held for less than ...

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Which account types require RMDs?

While there are a few exceptions for taking RMDs from your employer-sponsored plan while you are still working, ultimately you are required to take an annual RMD for all of the following account types: Traditional IRAs SEP IRAs SIMPLE IRAs Traditional 401(k) plans Traditional 403(b) plans Traditional 457(b) plans Profit sharing plans Traditional Thrift Savings Plans (TSPs) Qualified annuities Inherited Traditional IRAs Inherited Roth IRAs Roth 401(k), Roth 403(b), Roth 457(b), and Roth Thrift ...

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Are there any tax consequences for taking RMDs?

In general, any withdrawal from a pre-tax retirement account is considered to be taxable income, and will be taxed at your ordinary income rate. This also means that you may be bumped into a higher tax bracket because of your RMDs. In contrast, qualified distributions from Roth accounts are not taxed. You can consult with a tax advisor to better understand your holistic tax picture.

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Does Betterment offer additional assistance for RMDs?

You can leverage the help of our financial experts before starting your RMDs, to help ensure all of your financial decisions are coordinated to minimize taxes. Our team of financial professionals are happy to help you develop a tax smart financial plan as you approach your retirement years. If you have a Betterment for Business 401(k), please contact your employer for instructions on how to take your RMD.

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What is the deadline for taking RMDs?

You must withdraw your RMD amount from your IRA, 401(k), etc., by December 31st of each year. The one exception to this December 31st deadline is your very first RMD. Your first RMD can be taken as late as April 1st in the year following the year in which you turn either 70 ½ or 72, depending on timing, which is explained further below. If you turn 72 in 2021 or before, you must start taking your first RMD on April 1, 2022. Your next RMD will be due at the end of the year in 2022. You could ...

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How much am I required to withdraw for an RMD?

Each year, the amount you will be required to withdraw will change. It’s based on your age and the balance in your account on December 31st of the previous year. At Betterment, we calculate the RMD for your Traditional IRA each year for you, but anyone can calculate their own using the IRS worksheet. You can find your RMD amount on their Fair Market Value (FMV) Statement, which is available in your account in the Documents > Taxes section. If you have a Betterment for Business 401(k), please ...

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SEP IRAs

Can I have more than one participant in my Betterment SEP IRA?

No. Betterment does not support SEP IRA plans with more than one participant. Our SEP IRA is available for freelancers or small-business owners with no other employees participating in the plan. SEP IRAs can typically be used by small-business owners to provide retirement benefits to employees, and we are working to provide this capability in the future. If you plan to hire additional employees, please contact your tax advisor.

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Can I contribute to a SEP IRA and a Traditional or Roth IRA?

Yes. You can make contributions to a SEP IRA and make regular, annual contributions to a Traditional or Roth IRA. If you participate in a SEP IRA, you are considered an active participant in an employer-sponsored retirement plan. Typically, your Traditional IRA contributions are tax-deductible, but this can change based on the SEP IRA contributions you are making, your income, or other factors. Contact your tax advisor and read more on the IRS website. Betterment is not a tax advisor, nor ...

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What is a Simplified Employee Pension IRA (SEP IRA)?

A SEP IRA is a type of retirement plan for those who are self-employed or who are small business owners. At Betterment, we currently only support SEP IRAs for those who are self-employed or small business owners with no employees. A SEP IRA can be a simple and efficient way for self-employed individuals and small business owners to save for retirement without the stress of complicated plan administration. Betterment supports SEP IRAs for only one plan participant. Typically, small businesses ...

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How long will it take for my SEP IRA to transfer to Betterment?

Rollovers typically take 2 to 3 weeks to complete. You can contact your existing institution to liquidate the funds before it rolls over to help move things along. You will receive a confirmation email from rollovers@betterment.com once the rollover has completed. Get started today. There are no negative tax consequences for a direct transfer. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

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What forms do I need to fill out to get started with my SEP IRA?

It’s easy to start a SEP IRA with Betterment. When opening up a SEP IRA with Betterment, we’ll simply ask you to complete IRS Form 5305 and keep it for your own records. You do not need to mail this form to the IRS or to Betterment. To start a SEP IRA with Betterment: Navigate to Home Click “Add New” on the menu Choose the SEP IRA option (from the “Tax-advantaged Retirement” section) Download and complete IRS Form 5305 and keep it for your records. You do not need to mail this form to the IRS ...

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What's the difference between a SEP IRA and a Traditional or Roth IRA?

A SEP IRA is a type of retirement plan for those who are self-employed or who are small business owners. At Betterment, we currently only support SEP IRAs for those who are self-employed or small business owners with no employees. For self-employed individuals, the primary difference between a SEP IRA and a Traditional or Roth IRA is the annual contribution limit. For 2020, the contribution limit to SEP IRAs for those who are self-employed is the lesser of 20% of net income from ...

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How much can I contribute to a Betterment SEP IRA?

For 2020, the contribution limit to SEP IRAs for those who are self-employed is the lesser of 20% of net income from self-employment, or $57,000. For 20201, the contribution limit has increased to the lesser of 20% of net income from self-employment, or $58,000. SEP IRA contributions depend on the type of your business, your self-employment income and IRS income and contribution limits that vary by year. To learn more about how much you specifically can contribute, please refer to the IRS ...

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What tax forms will I receive from Betterment for my SEP IRA at the end of the year?

You will not receive any tax forms for your contributions, as the deadline for contributions is the due date of your tax return. However, any contributions will be reported on the Form 5498. This form is reported directly to the IRS by Betterment and will be uploaded to your account for reference. You will receive a Form 1099-R if you made any distributions at tax time. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax ...

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