This month during the legal segments for The Business Forum Show, Kevin Hunter and I will be discussing various aspects of retirement accounts, particularly dealing with alternatives to using your IRA as a “piggy bank”, taking early withdrawals and paying significant taxes, interest and penalties for doing so.
Our May 7 show covered the basics – the types of retirement accounts, the age when withdrawals are permitted and the penalties for early withdrawals.
To recap the basics on the types of retirement accounts, an Individual Retirement Account, or IRA, is a form of “individual retirement plan”, provided by many financial institutions, that provides tax advantages for retirement savings in the United States. IRAs are typically one of two varieties: “Traditional” or “Roth.”
A traditional IRA is a way to save for retirement that gives you tax advantages.
• Contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and
• Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.
A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to a traditional IRA.
• You cannot deduct contributions to a Roth IRA.
• If you satisfy the requirements, qualified distributions are tax-free.
• You can make contributions to your Roth IRA after you reach age 70 ½.
• You can leave amounts in your Roth IRA as long as you live.
• The account or annuity must be designated as a Roth IRA when it is set up.
The same combined contribution limit applies to all of your Roth and traditional IRAs. In addition, your Roth IRA contribution might be limited based on your filing status and income.
SEP and SIMPLE Plans
A SEP is a Simplified Employee Pension plan. A SEP provides employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Contributions are made directly to an IRA set up for each employee (a SEP-IRA). A SIMPLE IRA plan is a Savings Incentive Match Plan for Employees. It gives small employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or non-elective contributions. All contributions are made directly to an IRA set up for each employee (a SIMPLE-IRA).
Penalties for Early Withdrawal
Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay an additional 10% early withdrawal tax and report the amount to the IRS for any early distributions, unless an exception applies.
For more information on the ins and outs of IRAs, go to the IRS’ website.
Stay tuned the rest of this month for some alternatives to using your retirement accounts as your personal piggy bank.