Individual Retirement Accounts (IRAs) are a popular way for Americans to save for retirement. These tax-advantaged accounts allow individuals to contribute a certain amount of money each year, which can then grow tax-free until withdrawal. However, some certain rules and regulations govern IRAs, and it’s important to understand these before setting up or contributing to an IRA. Here are five key IRA rules that you should know:
Contributions Limits:
The amount of money that you can contribute to an IRA each year is limited by the IRS. For the tax year 2022, the limit is $6,000 for those under 50 and $7,000 for those 50 and older. It’s important to be aware of these limits and not exceed them, as doing so can result in penalties.
Income Limits:
There are also income limits that determine whether you are eligible to deduct your IRA contributions on your tax return. For traditional IRA, if you or your spouse are covered by a retirement plan at work, the deductibility of your contributions begins to phase out if your modified adjusted gross income (MAGI) is more than $98,000 for single filers and $198,000 for married couples filing jointly.
Required Minimum Distributions:
Once you reach age 72, you are required to start taking distributions from your traditional IRA. These required minimum distributions, or RMDs, are calculated based on your account balance and life expectancy. Failing to take your RMD can result in a penalty of 50% of the amount that should have been withdrawn.
Withdrawals:
Withdrawals from an IRA before age 59 ½ may be subject to an additional 10% early withdrawal penalty unless you qualify for one of several exceptions. Additionally, you’ll also owe income tax on the amount you withdraw from a traditional IRA, but not Roth IRA.
Roth Conversion:
if you have a traditional IRA you may convert it to a Roth IRA at any time, but you will owe taxes on the amount you convert in the year of the conversion. It’s important to consider the tax implications before making such a conversion.