Individual retirement accounts have many special rules to remember.
The benefits of a deduction now for your contribution to your regular IRA account include income tax savings (depending on your top tax bracket).
When you receive a distribution from the IRA, it is taxable income. That at least puts off the day of taxation. Maybe you will be in a lower income tax bracket then?
A disadvantage some folks don't remember is all of the income distributed from a regular IRA account is "ordinary" taxable income. If your account holds a stock that went up in value, you do not get the low capital gain tax rates. The distribution from the IRA will be taxed just like other taxable income.
That's why some folks try to own stocks outside of the IRA account. Then when they sell a stock at a gain, it is subject to the special low capital gain tax rates.
Because there are many special rules for IRAs, it might be good to keep all statements, communications, etc., in a binder. That way it's easy to see how you are doing with the investments. The file is easy to keep in date received order. The information is all in one place. If you have more than one IRA, why not keep each in a separate binder?
There are various kinds of penalties for not following the rules. If you put in too much, that can cause a penalty. If you are older than age 70 and don't take the Required Minimum Distribution in a timely way, that also can cause a penalty.
If you take a withdrawal with the idea you will put it back before 60 days have passed, but don't get it put back in time, that can cause a penalty also.
The good news is some penalties can and will be canceled by the IRS if you explain that while you tried to do the right thing, you have "reasonable cause" for the failure. You have to "knock before the door is opened."
The IRS has to get a letter, probably signed under penalties of perjury, that explains your good faith and proper intentions as well as the special problems or circumstances that caused the problem.
For example, if you failed to take the Required Minimum Distribution, but you relied on the advice of the custodian (stockbroker, bank, financial advisor, etc.), then the IRS will probably cancel the penalty. Just don't make the same mistake again.
Please also be sure the beneficiary designations on file with the custodian (holder of the money) are what you want. We urge folks to name contingent beneficiaries just in case the main beneficiary is not around or wants to decline accepting the IRA account.
Did you hear: "People get most tired when they are standing still."
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.
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