Your IRA is a Tax Time Bomb

Individual retirement accounts, also commonly referred to as IRA’s, are a great way to save for retirement and potentially reduce your current taxes. Although these benefits are great, there is a tremendous downside that can impact you if you make a wrong move.

Early Withdrawal Penalty: If you need to withdraw money from your IRA before you are 59 ½ or if you do not meet the exceptions to withdrawing early, then you will owe a 10% penalty, plus income taxes on the amount withdrawn. Depending upon your tax bracket and when considering state taxes, the taxes and penalties for an early withdrawal can equal about 50% of the amount withdrawn.

Required Minimum Distributions: Once you reach age 70 ½ you must start withdrawing from your IRA the following year. If you do not take the required minimum distribution then you will be subject to an excise tax of 50% of the amount you should have taken.

Improper Rollover: You can rollover your IRA to another IRA or a qualified retirement, such as a 401(k) plan without penalty. The problem arises if you withdraw funds from your IRA and do not place them in another IRA or qualified plan within 60 days. If this happens then the amount distributed will be considered taxable distribution and may even be subject to the 10% early withdrawal penalty.

There are other mistakes that can easily be made, such as not choosing a beneficiary or not making contributions to your IRA. The good thing is that there are tremendous benefits that an IRA offers, which we can save for another article.