FAQs about IRAs

The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 impacts a variety of the IRS rules normally governing IRAs. Please consult with your tax advisor regarding the changes resulting from the CARES Act and their impact to your situation.

IRA Basics

An Individual Retirement Account (IRA) is an account that provides individuals with a tax-advantaged way to save funds for retirement. There are two basic types of IRAs—traditional and Roth.

The maximum annual contribution allowed if you’re under 50 by December 31 is $6,000 for 2022 (subject to subsequent annual increases for inflation in $500 increments, as published by the Internal Revenue Service). If you’re 50 or older by December 31, the maximum contribution increases by $1,000. Your contributions can't exceed your annual taxable compensation or earned income. If you are married and file a joint tax return, the combined contributions of you and your spouse cannot exceed your combined earned income. The maximum amount that you may contribute to a Roth IRA  may be reduced in whole or in part if your modified adjusted gross income exceeds specified limits. See IRS Publication 590-A for details.

With a traditional IRA, you may contribute up to the maximum contribution limit for the year, and you may be able to deduct all, or a portion, of the contribution from taxable income. The maximum contribution limit for a traditional IRA is reduced by any contributions you make to a Roth IRA. Taxes on investment earnings are generally deferred until you withdraw the money. Withdrawals are taxed as ordinary income when received. Nondeductible contributions, if any, are withdrawn tax free. Withdrawals before you turn 59½ are assessed a 10% “early withdrawal additional tax” unless an exception applies. You’re required to begin taking withdrawals from your traditional IRA after you turn 72 (70½ for those born before July 1, 1949).

With a Roth IRA, the contribution limits are essentially the same as for a traditional IRA, but there’s no tax deduction for contributions. The annual maximum contribution limit for a Roth IRA is reduced by any contributions you make to a traditional IRA. You don’t pay income taxes on qualified withdrawals from your Roth IRA if certain requirements are met. Additionally, unlike a traditional IRA, there’s no requirement that you begin making minimum withdrawals during your lifetime.

See Traditional vs. Roth IRAs for more details. 

This depends upon your individual situation. A contribution to a traditional IRA may be tax deductible, while a contribution to a Roth IRA isn't deductible. Also, the benefits of a traditional IRA versus a Roth IRA may depend upon a number of other factors, including your current income tax bracket vs. your expected income tax bracket when you make withdrawals from your IRA, whether you expect to be able to make nontaxable withdrawals from your Roth IRA, how long you expect to leave your contributions in the IRA, and how much you expect the IRA to earn in the meantime.

We suggest you consult with a financial or tax advisor to determine whether you should establish a traditional or Roth IRA, or convert any or all of an existing traditional IRA to a Roth IRA. Your tax advisor can also advise you as to the state tax consequences that may affect whether a traditional or Roth IRA is better for you.

Transfers and Rollovers

Most distributions from eligible employer retirement plans are eligible for roll over to a traditional IRA. The main exceptions are payments over the lifetime or life expectancy of the participant (or participant and a designated beneficiary), installment payments for a period of 10 years or more, a loan treated as a distribution, required distributions from your retirement plan, and hardship withdrawals. 

All or part of an eligible rollover distribution may be transferred directly into your traditional IRA. This is called a “direct rollover.” Alternatively, you may receive the distribution and make a regular rollover to your traditional IRA within 60 days. By making a direct or regular rollover, you can defer income taxes on the amount rolled over until you make withdrawals from your traditional IRA. 

Note: The administrator of an eligible retirement plan must withhold 20% of your taxable distribution for federal income taxes unless you elect a direct rollover. Your plan administrator is required to provide you with information about direct and regular rollovers and withholding taxes before you receive your distribution and must comply with your directions to make a direct rollover. 

The rules governing rollovers are complicated. Be sure to consult your financial or tax advisor or IRS Publication 590-A if you have questions about rollovers.

Yes, if you haven’t rolled over the assets from another IRA within the previous 12-month period. A regular rollover from one traditional IRA to another must be completed within 60 days after the withdrawal from the first traditional IRA. After rolling over one IRA into another, you must wait one full year before you can make another such rollover. However, at any time you may instruct a traditional IRA custodian to transfer assets directly to another traditional IRA custodian; this is called a “direct transfer” and isn’t considered a regular rollover. Accordingly, a direct transfer isn’t subject to the one-year waiting period described above.

Rollovers, if properly made, don’t count toward the maximum contribution limits. Also, rollovers aren’t deductible, and they don’t affect your deduction limits as described above.

Yes, taxable distributions from eligible retirement plans can be used for rollover or direct transfer to a Roth IRA. Under certain circumstances, it may also be possible to make a direct transfer or rollover of a taxable distribution to a traditional IRA and then convert the traditional IRA to a Roth IRA. Consult your tax or financial advisor for further information.

You may currently transfer or roll over after-tax deferrals from a Roth account under an employer’s eligible retirement plan to a Roth IRA. If such amounts are rolled over to a Roth IRA, they’re subject to standard rules for the start date and holding period that apply to the owner’s Roth IRA(s).

Yes, if you haven’t received and rolled over the assets from another IRA within the previous 12 months. Such a regular rollover must be completed within 60 days after the withdrawal from your first IRA. After making a rollover from one IRA to another, you must wait one full year before you can make another IRA rollover. However, at any time you may instruct a Roth IRA custodian to transfer assets directly to another Roth IRA custodian; this is called a “direct transfer” and isn’t considered a rollover. Accordingly, a direct transfer isn’t subject to the one-year waiting period described above.

Rollovers, if properly made, don’t count toward the maximum contribution limits. Also, you may make a rollover from one Roth IRA to another even during a year when you aren’t eligible to contribute to a Roth IRA.

Eligibility Requirements

You received taxable compensation (or earned income if you’re self-employed) during the year for personal services you rendered. If you received taxable alimony, this is treated like compensation for IRA purposes if the payments are received under a divorce or separation agreement executed on or before December 31, 2018 (except in certain cases where such an agreement is modified after that date).

Compensation also includes any differential wage payments and nontaxable combat pay with respect to service in the uniformed services and any taxable amounts paid to you in the pursuit of graduate or postdoctoral study. Compensation doesn't include amounts received as a penalty or annuity, deferred compensation, earnings or profits from property (e.g., interest, dividends, and rent), or any other amount not included in gross income. In addition, if you receive qualified foster care payments that are difficulty of care payments, your contribution limit may be increased by the amount of such payments (and any contributions with respect to such pay are nondeductible). Compensation also includes certain amounts paid as scholarships and fellowships.

You received taxable compensation during the year for personal services you rendered (or earned income if you’re self-employed), subject to certain income limits. If you received taxable alimony, this is considered compensation for IRA purposes if the payments are received under a divorce or separation instrument executed on or before December 31, 2018 (except in certain cases where such an instrument is modified after that date).

Compensation also includes any differential wage payments and nontaxable combat pay with respect to service in the uniformed services and any taxable amounts paid to you in the pursuit of graduate or postdoctoral study. Compensation doesn't include amounts received as a penalty or annuity, deferred compensation, earnings or profits from property (e.g., interest, dividends, and rent), or any other amount not included in gross income. Compensation also includes certain amounts paid as scholarships and fellowships.

You may be ineligible to contribute to a Roth IRA if your modified adjusted gross income exceeds specified limits. See IRS Publication 590-A for details.

Contributions and Deductions

If you have compensation, you may contribute to a separate traditional IRA for your spouse, regardless of whether your spouse had any compensation or earned income in that year. This is called a “Spousal traditional IRA.” To contribute to a Spousal traditional IRA, you and your spouse must file a joint tax return for the year in which the contribution applies. For a Spousal traditional IRA, your spouse must establish his or her own traditional IRA, separate from yours, to which you contribute. The combined contributions of you and your spouse may not exceed your combined earned income.

If your spouse has compensation or earned income, your spouse can establish his or her own traditional IRA and make contributions to it in accordance with the rules and limits described in Part One of the IRA Disclosure Statement.

You may contribute to your existing traditional IRA or establish a new traditional IRA for a taxable year by the due date (not including any extensions) for your federal income tax return for the year. Usually this is April 15 of the following year. Contributions are voluntary and don’t have to be made every year.

For each year you’re eligible, you may contribute up to the lesser of the maximum dollar amount allowed for the year or 100% of your taxable compensation (or earned income if you’re self-employed). However, under the tax laws, all or a portion of your contribution may not be deductible.

The maximum contribution allowed if you‘re under 50 by December 31 is $6,000 for 2022 (subject to subsequent annual increases for inflation in $500 increments, as published by the Internal Revenue Service). If you’re 50 or older by December 31, the maximum contribution increases by $1,000.

If you make contributions to both traditional and Roth IRAs, the combined limit on contributions for a single calendar year is the maximum dollar amount indicated above.

If you’re married and file a joint tax return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. It doesn’t matter which spouse earned the compensation.

The deductibility of your contribution depends upon whether you or your spouse was an active participant in any employer sponsored retirement plan during the year for which the contribution was made. If neither you nor your spouse was an active participant in such a plan, the entire contribution to your traditional IRA is deductible.

If you were an active participant in an employer sponsored retirement plan, your traditional IRA contribution may still be completely or partly deductible on your tax return. The amount you may deduct depends on the amount of your “modified adjusted gross income,” or modified AGI. For single taxpayers covered by a workplace retirement plan, the phase-out range is $68,000 to $78,000 for 2022. For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $109,000 to $129,000 for 2022. For an IRA contributor who’s not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $204,000 and $214,000 for 2022. For an IRA contributor who’s married, files a separate tax return and lived with their spouse at any time during the year, the phase-out range is $0 to $10,000 for 2022.

These limits are indexed to the cost-of-living for years after 2021. Updated limits are published annually in IRS Publication 590-A.

Your (or your spouse’s) Form W-2 should indicate if you (or your spouse) were an active participant in an employer-sponsored retirement plan during the year. If you have a question about your status, you should consult your employer or plan administrator. 

In addition, regardless of income level, your spouse’s active participant status won’t affect the deductibility of your contributions to your traditional IRA if you and your spouse file separate tax returns for the taxable year and lived apart at all times during the taxable year.

If you (or your spouse) are an active participant in an employer-sponsored retirement plan during a year, the contribution to the active participant’s or spouse's traditional IRA for the year may be completely, partly, or not deductible depending upon your filing status and your modified adjustable gross income.

If your modified adjustable gross income falls in the partially deductible range, (i.e., between the lower and upper limits) you must calculate the portion of your contribution that is deductible. To do this, see IRS Publication 590-A.

The section titled “How much can you deduct” provides an explanation of how to determine your modified adjusted gross income, your coverage and filing status for purposes of deductibility, and a worksheet to help you figure if your IRA contribution is partly deductible or not deductible.

Even if part or all of your contribution isn’t deductible, you may still contribute to your traditional IRA (and your spouse may contribute to their spouse’s traditional IRA) up to the IRA Contribution Limit for the year. When you file your tax return for the year, you must designate the amount of non-deductible contributions to your traditional IRA for the year. See IRS Form 8606 and IRS Publication 590-A for more details.

Instructions to calculate your modified AGI are provided in IRS Publication 590-A.

For each year you’re eligible, you may contribute up to the lesser of the maximum dollar amount allowed for the year or 100% of your compensation (or earned income if you’re self-employed). The maximum contribution allowed if you’re under 50 by December 31 is $6,000 for 2022 (subject to subsequent annual increases for inflation in $500 increments, as published by the Internal Revenue Service). If you are 50 or older by December 31, the maximum contribution increases by $1,000.

If you’re married and file a joint tax return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. It doesn’t matter which spouse earned the compensation.

For taxpayers whose modified adjusted gross income exceeds specified levels, the contribution limits may be reduced or eliminated.

You may contribute to your existing Roth IRA or establish a new Roth IRA for a taxable year by the due date (not including any extensions) for your federal income tax return for the year. Usually this is April 15 of the following year. Contributions are voluntary, and don’t have to be made every year.

For each year you’re eligible, you may contribute up to the lesser of the maximum dollar amount allowed for the year or 100% of your compensation (or earned income if you’re self-employed). The maximum amount allowed if you’re under 50 by December 31 is $6,000 for 2022 (subject to increases for inflation in $500 increments). An additional catch-up contribution amount of $1,000 is allowed for individuals 50 and over by December 31. The overall annual limit for contributions to traditional and Roth IRAs combined (but not SEP or SIMPLE IRAs) is the maximum amount indicated above.

If you’re married and file a joint tax return, you and your spouse can each make Roth IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. It doesn’t matter which spouse earned the compensation. 

For taxpayers whose modified adjusted gross income exceeds specified levels, the contribution limits may be reduced or eliminated. If you make contributions to traditional and Roth IRAs, the combined limit on contributions for a single calendar year is the maximum dollar amount indicated above.

Contributions to a Roth IRA aren’t tax deductible. This is one of the major differences between Roth IRAs and traditional IRAs.

Rules and Tax Matters

You control the investment and reinvestment of contributions to your Dodge & Cox Funds — UMB Bank, n.a. IRA. Investments must be in one or more of the Dodge & Cox Funds. You direct the investment of your IRA by giving your investment instructions to the Transfer Agent for the Fund(s) as described in the Fund prospectus.

Before making any investment, carefully read the current prospectus for any Fund you’re considering as an investment for your traditional or Roth IRA. The prospectus will contain information about the Fund’s investment objectives and policies, risks, and charges and expenses, as well as minimum initial investment requirements.

Because you control the selection of investments for your IRA and because mutual fund shares fluctuate in value, the growth in value of your IRA can’t be guaranteed or projected.

The Custodian will report all withdrawals to the Internal Revenue Service (IRS) and the recipient on the appropriate form. For reporting purposes, a direct transfer of assets to a successor custodian or trustee isn’t considered a withdrawal (except for a direct transfer that results in a conversion of a traditional IRA to a Roth IRA, or a recharacterization of a Roth IRA back to a traditional IRA).

The Custodian will report to the Internal Revenue Service (IRS) the year-end value of your account and the amount of any rollover (including conversions from a traditional IRA to a Roth IRA) or regular contributions made during a calendar year, as well as the tax year for which a contribution is made.

Unless the Custodian receives an indication from you to the contrary, it will treat an amount received as a contribution for the tax year in which it’s received. It’s important that a contribution made between January 1 and April 15 before the due date of your federal income tax return for the prior year be clearly designated as such.

Any earnings on the investments held in your traditional IRA are generally exempt from federal income taxes and won't be taxed until withdrawn by you unless the tax-exempt status of your traditional IRA is revoked.

Withdrawals

You may withdraw amounts from your traditional IRA at any time. However, withdrawals before 59½ may be subject to a 10% early withdrawal additional tax, in addition to regular income taxes.

You must take your first required minimum distribution (RMD) from your traditional IRA by April 1 of the calendar year following the year in which you turn 72 (70½ for those born before July 1, 1949). RMDs must continue to be taken annually by December 31 of each year subsequent to the year you reach 72 (70½ for those born before July 1, 1949). If you elect to defer your first year’s RMD to April 1 of the following year, because you also must take your second year’s RMD by December 31 of that same year, you will need to take two RMDs in the second year. If you don’t take the RMD for the year in which you turn 72 (or 70-1/2, as applicable) by December 31 of that year, you’ll need to take two RMDs in the following year — the first by April 1 and the second by December 31. If you maintain more than one traditional IRA, you may withdraw the required amount from any traditional IRA from that traditional IRA or any other traditional IRA. It’s your responsibility to ensure that the required amount for each traditional IRA is taken each year.

Your annual RMD amount is determined by dividing the prior year-end balance in your traditional IRA(s) by the combined deemed life expectancy of you and another hypothetical person who’s 10 years younger than you. If you're married and your spouse is more than 10 years younger than you, the actual combined life expectancy of you and your spouse will be used if your spouse is your sole IRA beneficiary. The Custodian will calculate your RMD for you based on life expectancy tables published by the IRS. If you wish to take your RMD from your Dodge & Cox Funds — UMB Bank, n.a. traditional IRA, call 800-621-3979 or download an IRA Required Minimum Distribution Form.

The Internal Revenue Service (IRS) imposes a severe 50% penalty on the difference between your RMD amount and your actual distributions during a given year. This penalty is applied each year you fail to take your RMD. The IRS may waive or reduce the penalty if you can show your failure to receive your RMD was due to reasonable cause and that you’re taking reasonable steps to remedy the problem.

Because you may maintain other traditional IRAs in addition to a Dodge & Cox Funds — UMB Bank, n.a. traditional IRA, it’s your responsibility to ensure your distributions are timely and in amounts that satisfy the Internal Revenue Service (IRS) requirements. The RMD rules are complex; you may wish to consult your financial or tax advisor for assistance.

Yes, you can donate up to $100,000 per individual per year as long as you’re over 70½ on the date of the distribution. The charity to which funds are transferred from your IRA must qualify as a 501(c)(3) organization and be eligible to receive tax-deductible contributions. The maximum annual exclusion for a qualified charitable organization may be reduced based on deductible IRA contributions you make after 70½.

Withdrawals of previously untaxed amounts are included in your gross income in the taxable year that you receive them and are taxable as ordinary income. If you’ve made both deductible and non-deductible contributions, please refer to the question below. Amounts withdrawn will be subject to income tax withholding by the Custodian unless you elect not to have income taxes withheld. (See Part Three of this Disclosure Statement for additional information on withholding.) Amounts withdrawn before you reach 59½ will be subject to a 10% early withdrawal additional tax unless an exception applies. See IRS Publication 590-A for more details.

Withdrawal of nondeductible contributions (not including earnings) are tax free and aren’t subject to the 10% early withdrawal additional tax. However, if you made both deductible and nondeductible contributions to your traditional IRA, then each withdrawal will be treated as partly a distribution of your nondeductible contributions (not taxable) and partly a distribution of deductible contributions and earnings (taxable). The nontaxable amount is the portion of the amount withdrawn which bears the same ratio as your total nondeductible traditional IRA contributions bear to the total balance of all your traditional IRAs (including SEP IRAs, but not including Roth IRAs).

To simplify your record keeping for tax purposes, you may want to hold your traditional IRA annual deductible contributions and nondeductible contributions in separate traditional IRA accounts. Note, however, that for purposes of determining the extent to which a distribution is taxable, all IRAs, including all deductible and nondeductible contributions, for the same individual are aggregated.

You may withdraw amounts from your Roth IRA at any time. If the withdrawal meets the requirements discussed below, it’s tax free. Therefore, you pay no income tax on the withdrawal even though the withdrawal may include earnings on your contributions while they were held in your Roth IRA.

In contrast to a traditional IRA, there are no requirements on when you must start making withdrawals from your Roth IRA or on minimum required withdrawal amounts during your lifetime.

To be tax free, a withdrawal from your Roth IRA must meet two requirements to be considered a “qualified withdrawal.” First, the withdrawal must occur more than five years after the first day of the year for which you first contributed to your Roth IRA. Second, at least one of the following conditions must be satisfied:

  • You’re 59½ or older when you make the withdrawal.
  • The withdrawal is made to your beneficiary or estate after your death.
  • You’re disabled (as defined in the tax code) when you make the withdrawal.
  • You’re using the withdrawal to cover eligible “first-time homebuyer” expenses, up to a lifetime maximum of $10,000. These are the costs of purchasing, building, or rebuilding a principal residence (including customary settlement, financing or closing costs). The purchaser may be you, your spouse, or a child, grandchild, parent, or grandparent of you or your spouse.


See IRS Publication 590-B for more details.

If the qualified withdrawal requirements aren’t met, the tax treatment of a withdrawal depends on the character of the amounts withdrawn. To determine this, all your Roth IRAs are treated as one, including any Roth IRAs you may have established with other Roth IRA custodians. Amounts withdrawn are considered to come out in the following order:

  1. All annual contributions.
  2. All traditional IRA conversion and rollover amounts (on a first-in, first-out basis), with the taxable portion first and then the nontaxable portion.
  3. Earnings on contributions.

A withdrawal treated as prior annual contributions to your Roth IRA won't be considered taxable income in the year you receive it, nor will any premature withdrawal penalty apply. A withdrawal that’s treated as any other amounts may be includible in income and could be subject to the early withdrawal additional tax and a recapture tax. These ordering rules are complex, so see IRS Publication 590-B for more details on how to figure the taxes on a nonqualified withdrawal from your Roth IRA.

Traditional IRAs
Generally, federal income tax will be withheld at a flat rate of 10% from any withdrawal from your traditional IRA unless you elect not to have tax withheld. State withholding may also apply. Additional withholding also applies if you’re a non-U.S. person.

Roth IRAs
Distributions from your Roth IRA are generally not subject to the 10% withholding that applies to traditional IRAs, regardless of the extent to which the distributions are qualified or nonqualified, taxable or nontaxable and whether or not attributable to earnings.

Conversions

Conversion may be accomplished in two ways. You can initiate a “direct transfer” from your traditional IRA to a Roth IRA, or you can choose to withdraw the amount you want to convert and roll it over to a Roth IRA.

Caution: If you’ve reached 72 (70½ for those born before July 1, 1949) by the year in which you convert a traditional IRA to a Roth IRA, be careful not to convert any amount that would be a required minimum distribution. Required minimum distributions may not be converted to a Roth IRA.

The amount of your traditional IRA that you convert to a Roth IRA will be considered taxable income on your federal income tax return for the year of the conversion. All amounts converted from your traditional IRA are taxable except for your nondeductible contributions to the traditional IRA. Consult your financial advisor for more information.

If you have a SEP IRA or a SIMPLE IRA, you may convert it to a Roth IRA. However, with a SIMPLE IRA, this can be done only after the SIMPLE IRA has been in existence for at least two years.

Only you can answer this question, in consultation with your tax or financial advisor. A number of factors, including the following, may be relevant:

  • Conversion may be advantageous if you expect to leave the converted funds in your Roth IRA for at least five years and would like to be able to withdraw the funds under circumstances that won’t be taxable (see below).
  • The benefits of converting will also depend on whether you expect to be in the same tax bracket as you are now when you withdraw funds from your Roth IRA.

Note: There are important differences in the tax rules for Roth IRA assets attributable to annual contributions vs. assets that were converted from a traditional IRA. Therefore, to simplify your record keeping for tax purposes, you may want to hold your Roth IRA annual contributions and Roth IRA conversion amounts in separate Roth IRA accounts.

Beneficiaries

The assets remaining in your IRA will be distributed upon your death to the beneficiary(ies) you designate when you establish your Dodge & Cox Funds — UMB Bank, n.a. IRA. You may change your beneficiary(ies) at any time by completing a written IRA Beneficiary Designation form. If there’s no beneficiary designated for your IRA in the Custodian’s records, upon your death your IRA will be paid to your estate (unless otherwise required by the laws of your state of residence). If there’s no primary beneficiary(ies) living and you didn’t elect per stirpes designation (where each member of the family receives an equal share) at the time of your death, payment of your IRA will be made to the surviving alternate beneficiary(ies) designated by you.

There are Internal Revenue Service (IRS) rules on the timing and amount of distributions required after the IRA owner’s death. These rules are complex and periodically change, so please consult with your tax advisor.

We’re here to help

Call

800-621-3979

Monday – Friday,

8 a.m. – 7:30 p.m., Eastern time.

Mail

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Dodge & Cox Funds

P.O. Box 219502

Kansas City, MO 64121-9502

 

Express Mail

Dodge & Cox Funds

430 W Seventh Street, Ste 219502

Kansas City, MO 64105-1407

 

Tax laws and regulations are complex and subject to change, which can materially impact investment results. Dodge & Cox cannot guarantee that the information herein is accurate, complete, or timely and makes no warranties with respect to such information, including your use of, or any tax position taken in reliance on, such information. Only Dodge & Cox Funds are available for purchase in a Dodge & Cox Fund IRA Account. Investment options available through an employer's retirement plan or other IRA providers and any associated fees and expenses will differ. Consult with a tax or legal advisor before making any investment decision.