Beware of tax penalties for IRS and 401K tax distributions .
An IRA is one of the ways you achieve your long-term investment goals, as long as you are aware of IRS restrictions. And restrictions do exist.
An Individual Retirement Account (IRA) is a tax-advantaged retirement savings plan regulated by the Internal Revenue Service. As the intent of the plan is to encourage long-term, tax-deferred savings, the IRS enforces regulations penalizing misuse of the account.
At the same time, the IRS limits the amount you can contribute to an IRA and restricts the length of time you can avoid paying tax on the account.
Failure to adhere to all IRS regulations will result in additional tax or penalties being assessed on the account. Be aware of these restrictions.!!
Excess accumulations into the fund.
Once you reach the age of 70 1/2, the IRS requires that you begin taking annual minimum distributions from your IRA. The amount of the distribution is based on the value of your account and your life expectancy, according to IRS tables.
If you fail to withdraw at least the minimum required amount from your IRA, the IRS will levy a 50 percent tax on the amount you did not withdraw.
This tax will be assessed annually until the minimum amount is withdrawn.
What a penalty, 50%.
Excess Contributions into the fund
The IRS limits the amount you can contribute to an IRA, and amounts contributed in excess of the limit are assessed a 6 percent tax until they are withdrawn. For 2010, the maximum contribution is $5,000 if you have taxable compensation of at least that amount ($6,000 maximum contribution if you are 50 or older).
Early Withdrawals
If you withdraw from an IRA before you reach the age of 59 1/2, in addition to the withdrawal counting as ordinary income tax, you will have to pay a 10 percent penalty tax on the amount withdrawn. This penalty can be waived in certain circumstances, including death, disability, excess un-reimbursed medical expenses or the first-time purchase of a home up to $10,000. You should call Fresh Start Tax if you need help in this area. We are the tax pro’s on Abatement of Penalties.
60 Day Rollover Window
If you are rolling over funds to or from your IRA account, you have 60 days to complete the rollover or it will be considered a distribution.
Distributions are subject to ordinary income tax, plus the 10 percent early-withdrawal penalty if you are under the age of 59 1/2.
Prohibited Transactions
Certain transactions are prohibited in IRA accounts, such as borrowing from an IRA or using IRA funds to buy property for personal use.
Prohibited transactions result in an IRA’s being disqualified and treated as being distributed, subjecting it to ordinary income tax and early-withdrawal penalties as appropriate. Similarly, certain investments, such as collectibles, are also restricted within IRA accounts, and amounts invested are treated as having been distributed.
