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Individual Retirement Accounts are not easy to understand. In fact, they can be so tricky that I would suggest
you take any of my information to heart and with a grain of salt. Although I will try my best to give 100% accurate
information, I cannot suggest enough that you speak with a tax advisor/tax accountant/tax lawyer etc about the information
provided here. Think of this page as a means of which for you to say "you know what I heard..." and confirm with them
the accuracy of all information provided below.
Why do I say this? Because, just like taxes, the rules associated with IRAs change ALL the time. By the time
you read this, some of the information listed here may be out of date. As I mentioned, I will do my best to update this
as much as possible. But the last thing I want you to do is take this information for gospel, only to get in trouble
with your tax advisor (or even worse, the IRS!) for using my information instead of the most up to date information.
So, let's talk first about the two of IRAs : Traditional IRAs and Roth IRAs.
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Funds are tax deductible for most people. This means you pay no taxes on the funds deposited but you
will pay tax on the funds when they are withdrawn.
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Funds are deposited after taxes are paid on them, but when the funds are withdrawn taxes are not paid on
the principal balance OR interest earned.
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Penalties
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IRA owner must be at least 59 1/2 years old to avoid a 10% penalty. This is a penalty imposed by the federal government,
not the financial institution that houses the IRA.
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As long as the IRA is open at least 5 years, the owner may withdraw any principal funds added to the account. In
order to access the interest on the account without a penalty, the owner must be at least 59 1/2 years old.
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Exceptions to avoid penalties
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Funds may be withdrawn without a penalty if they fall under the following categories:
- Extreme medical expenses
- Health Insurance Premiums (in certain cases)
- First-time home buyers
- Certain expenses for higher education
- Death
- Equal distributions based on life expectancy
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Funds may be withdrawn without a penalty if they fall under the following categories:
- Extreme medical expenses
- Health Insurance Premiums (in certain cases)
- First-time home buyers
- Certain expenses for higher education
- Death
- Equal distributions based on life expectancy
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Limit to contributions
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Once the owner reaches 70 1/2 they are no longer able to contribute to the IRA
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No limits: owner may contribute to the IRA as much as legally possible for as long as they would like.
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Required Minimum Distributions (RMDs)
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RMDs are required once owner reaches age 70 1/2. RMDs are calculated by taking a formula which incorporates the
owner's expected remaining life span and dividing the IRA funds into equal yearly distributions until they are assumed to
pass away.
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RMDs are not required. Not only may the owner continue to make contributions past the age of 70 1/2 but they are
not required to make withdrawls.
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