Seven Common Misconceptions about IRAs

An Individual Retirement Account or IRA, is a common type of financial account that many Americans use for their Retirement. IRAs are so common that you could assume that most people know all about them and how they work.  Yet here are a few misconceptions about IRAs:

  1. You “invest” in an IRA.   A lot of people mistakenly think an IRA itself is an investment. You “invest” in a type of instrument like a CD, stock, bond, mutual fund, etc. inside of an IRA.  An IRA is simply a tax selection on that investment.
  2. You need multiple IRAs.   One IRA can hold it all, if your custodian (the institution that holds your account) allows it.
  3. Beneficiary forms are not that important.  Nothing could be further from the truth.  Your IRA beneficiary form trumps all other forms.  It doesn’t matter what your will or trust says about your IRA money, it will go to the beneficiary named in the IRA documents.
  4. You can borrow from your IRA.  401k plans often allow you to borrow up to certain limits, but not IRAs.
  5. You can withdraw money without a 10% penalty for hardship.  Again, only with 401k plans, not with IRAs.
  6. You must withdraw cash.  Actually, you can do an “in-kind” transfer for your distribution.  Let’s say you own 100 shares of ABC stock. You could withdraw 15 shares, 25 shares, or any amount of shares as a distribution.  That way, you don’t have to sell the shares and re-purchase them in your regular account.  You simply transfer those shares directly from your IRA to your personal account.
  7. You can only convert to a Roth IRA if your income falls below certain limits.  Roth conversions are available at any income limit, and those with million dollar incomes are some of the most active at converting their IRAs to Roth IRAs.

These are seven of the most common things we see in our office. If you have any questions or concerns regarding IRAs and would like to speak with a Retirement Planning Specialist call our office at (775) 853-9033.

Chris Abts