RETIREMENT – IRA

It’s the end of the year and you’re thinking about holidays – Chanukah dinner, Christmas celebrations, plans for New Year’s Eve – happy events all around. The family will gather, and merriment will ensue with gifts, great times, wonderful memories. Whether your plans include latkes and dreidels along with lighting the menorah or stocking stuffers and Santa, a white Christmas as a backdrop for caroling, the little ones are waiting for their presents and happiness is all around.

One thing often overlooked is it is also the time of the year to make sure you have contributed to your IRA. You have until April 15, 2018 to make your contribution whether it is an original IRA or a Roth IRA. If by chance you do not have an IRA, it is a good thing to have and you should open an IRA with a bank or a securities firm. Think of it as the gift to yourself and your family that keeps on giving.

The rules are simple:

For 2017, you can contribute $5,500.00. If you are over 50, you can contribute $6,500.00. If you are single the limit starts to decrease once your income reaches $118,000.00 and at an income level of $133,000.00, the contribution amount is zero.

If you are married, the 2017 income levels adjust from $186,000.00 to $196,000.00.

For 2018, the same contribution limits and age parameters apply. But there are new income levels. Singles go from $120,000.00 to $135,000.00 and married couples go from $189,000.00 to $199,000.00.

No matter what your category, you want to contribute the maximum to get non-taxable growth and a deduction under the original IRA. If this is a Roth, you cannot get a deduction, but you do get tax-deferred growth and withdrawal of the principal will be tax free.

Generally, you cannot make any withdrawals prior to age 59 ½ and you must start withdrawing at age 70 ½. There are exceptions to the withdrawal rules prior to age 59 ½ to avoid any penalties.

Some of the exceptions are:

Qualified Distributions vs. Non-Qualified Distributions

The IRS distinguishes between qualified and non-qualified distributions when determining whether to apply a penalty to Roth IRA withdrawals.

To count as a qualified distribution and avoid the 10 percent penalty, your Roth IRA must have been open for at least five years. The distribution must also meet certain criteria. Aside from being able to make penalty-free withdrawals after age 59½, you can also avoid the penalty for these three reasons:

  1. If you become totally and permanently disabled and can no longer work, the IRS allows you to withdraw money from your Roth IRA, regardless of age, without paying the 10 percent tax penalty.
  2. Inheriting a Roth IRA from someone else falls under the qualified distribution according to the IRS.
  3. You’re buying a first home. If you need some cash to cover the down payment or closing costs on a first home, you could withdraw some of your earnings – up to $10,000.00 – from a Roth IRA without a penalty even if you’re under age 59½.

Exceptions to the 10-Percent-Penalty Rule:

If a Roth IRA withdrawal doesn’t meet the definition of a qualified distribution, it is a non-qualified distribution. That doesn’t mean that you have no chance to escape Roth IRA early withdrawal penalties. The IRS gives you some leeway for making penalty-free withdrawals if:

  1. You’re taking a distribution to pay unreimbursed medical expenses. If you have out-of-pocket medical expenses that you need to cover. To qualify, your unreimbursed medical expenses must exceed 10 percent of your adjusted gross income (7.5 percent if you or your spouse were born before Jan. 2, 1952).
  2. Avoid the tax penalty if you spend some of your Roth IRA to maintain your health insurance premiums because you’re unemployed. The IRS will waive the penalty if you lost your job, you received unemployment compensation for at least 12 consecutive weeks, you took the distribution the same year you received unemployment or the next year, and you received the distribution no later than 60 days after going back to work.
  3. A college degree is pricey these days. If you’re footing the bill for education expenses, your Roth IRA may be a valuable source of funding. It’s possible to avoid the 10 percent penalty if you’re using Roth IRA assets to pay for qualified education expenses for yourself, your spouse or your child. Qualified education expenses include tuition, fees, books, supplies and equipment required for enrollment, and room and board for students enrolled at least half-time (there are specifics about how much you can spend).
  4. In some cases, you may need to make regular withdrawals from a Roth IRA before age 59½, instead of taking a single lump-sum distribution. If you’re taking periodic distributions of the same amount, the 10 percent penalty wouldn’t kick in. The IRS can use one of three methods to determine the amount of the payments you may receive. The law requires payments be spread over five years.
  5. If you have unpaid federal taxes, the IRS can draw on your Roth IRA to pay the bill. The 10 percent penalty won’t apply if the IRS levies the money directly. If, on the other hand, you withdraw the money and use it to pay your tax bill, you’d have to pay the penalty if you don’t meet the qualified distribution guidelines.
  6. Military personnel on active duty can withdraw money from their Roth IRA without fear of a penalty.

Double Check The Rules

These exceptions for your Roth IRA have many rules associated with them so please double-check the Roth IRA withdrawal rules and consult a tax professional before taking money out of your account. Making sure you meet the requirements for a penalty-free withdrawal will help you preserve the rest of your retirement assets.

As for an original IRA, the exception rules are basically the same as a Roth IRA but beware of small differences and always check with your tax professional.

Furthermore, federal law protects your IRA from creditors and attachments to pay judgment and or liens.

So now is the time to review your IRA options and make sure you have contributed the maximum amount allowable so that in the future you can sit back and enjoy all the holidays in all the years to come.

This post is for informational purposes only.  It should not be considered financial advice.  You should consult with a financial advisor or other professional to determine what may be best for your individual needs.