Are you taking advantage of individual retirement account (IRA)
opportunities? IRAs can be frustrating because of the different
forms and reports, difficult or confusing IRA rules. Successful
retirement planning usually means coordinating personal savings
with benefits from an employer's retirement plan and social
security. However, in the last 30 years, retirement planning has
changed, putting more emphasis on personal saving through
retirement plans at work and through IRAs.
IRA Owner Benefits As additional incentives to save, IRAs
provide current tax benefits, such as:
Tax-deductible contributions to eligible individuals of
traditional IRAs (since 1975) Nontaxable distributions from Roth
IRAs (starting in 1998) are found to be a more attractive
alternative by many individuals who are ineligible for
traditional IRA deductions Income tax deferral on IRA earnings
enjoyed by both traditional IRA and Roth IRA owners Although tax
benefits are important savings incentives, IRA owners also enjoy
these advantages:
IRA distributions are generally available at any time (though
there may be a penalty for withdrawal before age 60) IRA
investment options are nearly limitless IRA assets are eligible
for a tax-free transfer between financial organizations
Contributions and Distributions
You invest money in an IRA, up to the amounts allowable under
the tax law. These investments are termed "contributions." In
many instances an income tax deduction is available for the tax
year for which the funds are contributed. The contributions, as
well as the earnings and gains from these contributions,
accumulate tax-free until you withdraw the money from the
account. You therefore enjoy the ability to generate additional
earnings, unreduced by taxes on these earnings, each year the
funds remain within the IRA.
The withdrawals of the funds from the IRA are termed
"distributions." Distributions are subject to income taxation,
generally in the year in which you receive them. Remember that
in most cases you received an income tax deduction when you
contributed the money to the IRA.
When You Can Cash In Your IRA
Since the original purpose of the IRA is to assist you in
providing for your own retirement, it is not to your advantage
to withdraw funds from an IRA before age 60. This disincentive
takes the form of a 10 % tax "penalty" of the distributions
received by you prior to age 60, unless certain exceptions
apply. Given the complexity of this issue alone, professional
advice should be obtained whenever significant amounts of
distributions are needed. The fact is that many times the
penalty can be avoided with proper planning. Obviously these
distributions are subject to income taxation upon receipt. Once
you are age 60 this "Premature Distribution" penalty is no
longer applicable.
On the flip side of the government not wanting you to withdraw
your money at too young an age, it also has rules to prevent you
from not withdrawing the money soon enough. This is done in
order that the government can tax it. You usually need to begin
taking money from your IRA no later than April 1 of the calendar
year following the date you attained age 70 1/2. The rules
established by the government regarding these Required Minimum
Distributions, their timing, the amounts, the recalculations,
and the effect various beneficiary designations have on them,
are among the most complex of the Internal Revenue Code. The
penalty is 50 % of the shortfall between what you should have
withdrawn and the amounts you actually withdrew by the proper
date. This punitive penalty is matched only by the civil fraud
penalty in severity. The necessary calculations are therefore
not something that most individuals should attempt on their own.
You may freely reprint this article provided the following
author's biography (including the live URL link) remains intact:
About the author:
John Mussi is the founder of Direct Online Loans who help
homeowners find the best available loans via the
www.directonlineloans.
co.uk website.
