Many people have heard of IRAs, but only some understand how they work. This is a big mistake IRAs are an important way to save and invest for retirement, so you want to ensure you’re using them right. Here are seven IRA rules that can help you fund and manage your tax-advantaged savings tool:
You can only contribute to an IRA after the deadline.
You can only contribute to an IRA after the deadline. If you miss it, you’ll have to wait until next year.
The deadline for contributing to an IRA is the same as the deadline for filing your tax return: April 15th. If you get around to filing after then (or if you file an extension), you’ll still have time (but only until October 15th) to make contributions for that tax year. After that point, any money contributed will go toward next year’s contribution limit instead of this year’s, so if there’s anything left over from this year or last year that hasn’t been put into an account yet but could be used now without affecting next year’s contribution limit (say because someone else opened up their account), consider taking advantage of this opportunity!
You can’t take back the money you’ve already contributed to your IRA.
You can’t take back the money you’ve already contributed to your IRA. Suppose you withdraw a contribution from an IRA before age 59 1/2. In that case, it’s considered an early withdrawal and subject to income tax plus a 10% penalty unless there are extenuating circumstances (for instance, paying medical expenses).
You also won’t get a tax deduction for contributions to an IRA if your employer offers a 401(k) plan that allows matching contributions. That is if they kick in half of whatever amount you put into the retirement plan up to certain limits.
You have to be careful with withdrawals from your IRA.
You can’t withdraw the money you’ve contributed to your IRA. However, the earnings on that money are fair game for a withdrawal. You may have to pay taxes on those earnings.
To avoid penalties and keep things simple, stick with certain types of withdrawals:
- Age 59 1/2 or older – You can take out as much money as needed without penalty if you’re over 59 1/2 and have had an IRA for at least five years. This rule applies regardless of whether or not you need the cash; it applies even if the amount withdrawn is less than $1 (or more than $1).
- Death – The beneficiary named in your account will receive all remaining funds upon death without any tax consequences or penalties whatsoever–this includes earnings!
The IRS gets a cut of your earnings when they’re held in an IRA.
The IRS gets a cut of your earnings when they’re held in an IRA.
In most cases, the annual contribution limit for IRAs is $6,000 per year (in 2019). If you are 50 or older and have been working for at least five years, you can contribute up to $7,000 annually. The maximum amount that an employer-sponsored retirement plan can contribute is also $7,000 per year (in 2019).
The insurance premium on your life is deductible.
- You can deduct the cost of your life insurance policy. If you pay for a qualifying policy, it’s considered an itemized expense and thus deductible from your taxes. However, there is a limit on how much you can deduct: The IRS allows taxpayers to write off up to $50,000 per year for premiums paid on any one person’s coverage (or up to $100,000 if two people are covered).
- If you’re self-employed or own a business with no other employees besides yourself and immediate family members who are also owners/employees of the company–and if those owners/employees don’t have access to any other group plan through their employers–you may be eligible for another tax break: The 7% credit toward health care costs offered under Obamacare (aka “the Affordable Care Act”). This would apply whether or not these individuals have access through their spouse’s employer; however, they must be considered full-time workers by law before receiving this benefit.
Your family will get the money in your IRA when you die.
When you die, your IRA goes to your estate. Your beneficiaries can take the money into the account or leave it in. If they do not decide how to handle their inherited IRA within nine months of receiving it, it will be distributed according to IRS rules.
Suppose they want to take a distribution from an inherited traditional or Roth IRA (or both). In that case, they must take the required minimum distributions by December 31st of that year unless they are still working at least part-time and have attained age 70 1/2 by then. If these conditions don’t apply and you have more than one beneficiary for this account, each beneficiary must take their RMDs separately based on their life expectancy for that year.*
Funding and managing an IRA is crucial to ensure it serves you well as a tax-advantaged savings tool.
An IRA can be a powerful tool for building wealth and securing your future. But it’s also important to understand how IRAs work so that you don’t make mistakes that cost you money or prevent you from reaching your goals.
Here are some of the most common rules governing IRAs:
- You must be eligible to contribute to an IRA based on age and income level. If not, consider other tax-advantaged investment vehicles such as 401(k)s or 529 college savings plans.
- You must designate one type of account (such as traditional or Roth) when opening an account with any financial institution offering IRAs; once established, this designation cannot change without penalty until after 59 1/2 years old–and even then, only if certain conditions are met (for example, having withdrawn all pretax contributions).
- In addition to investing in stocks and bonds through mutual funds or exchange-traded funds within their respective portfolios’ holdings lists during normal trading hours each day between 9 AM EST Monday through 4 PM EST Friday each week while holding onto those investments until they reach maturity age 65 years old before cashing out any profits from their initial investments into said funds’ accounts during retirement income planning meetings with your financial advisor every year prior December 31st midnight deadline date!
In summary, IRAs are a great way to save for retirement and can be used as a tax-advantaged tool for other goals. You must be careful about how much money you put in and how often you withdraw from your account. By following these rules, you’ll be able to make sure that your IRA works hard for you.