How to Retire Comfortably and Happy on Less Money than the Financial Experts Say You Need by Connie Brooks

Author:Connie Brooks
Language: eng
Format: epub
Publisher: Atlantic Publishing
Published: 2014-06-24T00:00:00+00:00

Special Tax Considerations for IRA Accounts

Addenda, provisos, and restrictions do apply where Roth IRAs are concerned. Tax laws seem to be written in Greek for the entertainment of the IRS, but they are easy enough to navigate once you know the rules. As far as your Roth IRA account is concerned here is what you need to know.

You cannot contribute money to an IRA if you did not earn any money that year. Income derived from investments does not count — it has to come from a job. There are special provisions for households where one spouse works and the other does not. As long as you file a joint tax return, the working spouse can contribute to an IRA account for the non-working spouse.

You can never put more money than you make in a year into your IRA. The IRS does not like this, and they will wonder where the extra money came from.

You can apply your IRA contributions to the previous year right up until the time you file your taxes in April of the following year. This means that if you did not meet your maximum before January, you can still keep contributing until April and count it towards the previous year when you file your taxes.

If you withdraw money from your traditional IRA account before you reach 59 and a half, you will be hit with a 10 percent early withdrawal tax. The Roth IRA is an exception, because you can withdraw the original amount of your investment (but not anything it has earned) without paying the 10 percent tax.

Getting Around the 10 Percent Tax

While the idea behind retirement funds is to leave your retirement money in them, situations could arise that cause you to need that money sooner than you planned. If that is the case, there are legitimate reasons where the IRS will allow you to pull money out of your retirement accounts.

There is one rule you must follow. The money must have been in your account for five tax years (not calendar) before you attempt to withdraw it for any of these reasons. Otherwise, you will face the 10 percent tax, even though it was a legitimate reason.

1. The first-time purchase of a home — If you have never owned a home before and need to pull money out of your retirement account to purchase one — that is allowed. You can only pull out a lifetime amount up to $10,000 for this reason, so be careful.

2. Paying back taxes — If you owe money to the IRS, you can pay them back out of your retirement account.

3. Permanent disability — If you are injured permanently, and unable to work, you may withdraw your money from your IRA account without penalty, as long as the money has been in your account for at least five years.

4. Your death — When you die, your family may withdraw your funds as part of your estate.

5. Medical bills — If your out-of-pocket medical expenses total more than 7.

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