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IRA Tips & Warnings - Part 1

One of my favorite websites is bottomelineinc.com, where you can find interesting information on a wide variety of topics, not simply financial items.  One recent financial piece from them discusses things you need to know about Individual Retirement Accounts (IRAs).

I wouldn’t expect to have truly comprehensive information on a website devoted to a variety of disciplines, so I will give them credit for several good ideas, but I’ll embellish with some observations and expansions of my own.  In this week’s blog we cover the first few, and next week we’ll continue with more from our own experiences.

According to bottomlineinc.com, these are things everyone should know about IRAs:

  • IRA owners who have not attained age 59-1/2 will be charged a 10% early withdrawal penalty, unless they use a legal device called a 72t, or a Series of Substantially Equal Payments (SEPP).  The SEPP payments can be calculated based on information found on the IRS website.  There must be at least 5 payments, and they can’t end until you have reached age 59-1/2.  I would add that early withdrawal penalties apply until the day you turn 59-1/2.  Unlike many tax rules that use your age at year-end, this rule refers to your actual age.
  • Penalties may also be avoided by using the withdrawn funds to pay medical expenses in excess of 10% of your Adjusted Gross Income (AGI).  I would add that the withdrawal of the IRA funds will add to your AGI, so care must be taken to adhere to the rule for penalty avoidance.
  • IRA owners who are permanently disabled may withdraw penalty-free funds at any age (the income is fully taxed).
  • Separating IRAs is sometimes necessary, but can also be done for convenience.  Traditional IRAs can be lumped together, but must be separate and distinct from Roth IRAs and/or Inherited IRAs.  IRA owners wishing to hold non-traditional investments, including precious metals and real estate, need to form separate IRAs in which the non-traditional assets are to be held.  I would add that there are many advertisements today for holding precious metals “in your home.”  In my opinion, this “advice” is very risky, and could cause your IRA to lose its tax-deferred status.  I would also add that the rules for holding real estate in your IRA are onerous and complex, and should only be done after reaching an in-depth understanding of the rules.
  • Working spouses can contribute to their own IRA, and in addition, to a “Spousal IRA” for a non-working spouse, subject to the same rules all IRA owners have, including earned income limitations and age-based contribution limits.  I would add that the rules for IRA eligibility are complex, and if misunderstood or misapplied, could be costly.

For a better understanding of the various IRA rules, listen to our radio show, or call the office at (904) 685-1505.  Van Wie Financial is fee-only – for a reason.