An IRA is an individual retirement account or individual retirement arrangement provided by financial institutions that have tax advantages when trying to save for retirement. If you are eligible for an IRA, you can choose to defer any taxes until you make withdrawals in the future, or you can choose an IRA account where you make the contributions after paying your taxes in exchange for tax-free distributions in the future.
There are quite a few types of IRA’s with the main two types being a traditional IRA and a Roth IRA. Because these accounts provide so many tax advantages pertaining to retirement savings, there are an abundance of IRA rules that must be followed.
There are many IRA rules that apply to contributions and investments, meaning you are allowed to contribute a certain amount to the account. Once you exceed this amount, you will penalized. The amount you are allowed to contribute is determined by your age, income, and tax filing status.
- You cannot make contributions to a traditional IRA if you are over the age of 70 1/2.
- There are penalties for exceeding contribution limits. If you exceed the set limits, the penalty is 6%. Example: if you exceed the contribution limit by $500, you would be penalized $30 every year until the mistake is corrected.
- If you have a self-directed IRA, you are not allowed to invest in collectibles.
- Withdrawing any distributions before reaching the age of 59 1/2 incurs a 10% penalty plus income tax. Exceptions include death or disability of the IRA owner, withdrawals to pay certain medical bills, first time home purchases, and higher education expenses.
- You are prohibited from using the account as a margin account or security for a loan, or selling property to your IRA.
Just be sure to have an upstanding broker when you decide to open an IRA as they will handle all of the rules for you. Goldco can help!