 Internal Revenue Service IRS tax news. IRAs, IRAs are one tool in the retirement planning toolbox. It's kind of like the electric drill in the toolbox, because it kind of holds everything else together oftentimes. But in any case, first an attempt at a joke. Democrats, after being kicked out of office for incompetence. It's a major disgrace. The idea of working in the private sector obviously terrifying them. They're like, what am I gonna do now? Get a nine to five job like some normal person? Einstein did his best stuff when he was working as a patent clerk. You know how much a patent clerk earns? But why don't politicians want to just leave office after their term? Their public service is done. Move on with their life. I mean, isn't that how the system was designed to work in the first place? It gave us money and facilities. We didn't have to produce anything. But wait a second. Surely it's not so bad working in the private sector like everyone else? I mean, politicians are supposed to be representing normal people who work in the private sector, aren't they? You don't know what it's like out there. I've worked in the private sector. And what's so bad about the private sector, which is so terrifying to politicians? The thing they fear most? The thing they've never had to confront before in their life? The thing that haunts their dreams to the point that it sometimes even wakes them up in the middle of their midday post-massage siesta? They expect results. IRS tax tip 2022-107 July 14th, 2022. There are many ways for people to plan for retirement. Individual retirement arrangements or IRAs, IRAs are a common one. IRAs provide tax incentives for people to make investments that can provide financial security when they retire. So quick recap on the IRAs. You're going to get a tax benefit. That's why you would basically put the money into an IRA similar to a 401K or a 403B. But those plans are typically offered through the employer. And they can even be more beneficial oftentimes. So oftentimes we think if you have access to the 401K or the 403B, you might want to try to max those out because you might also get a matching kind of benefit related to it. And you might have more money that you could basically put into those types of accounts. If you don't have access to those and or if you put money into them and you still have the capacity to put money into an IRA, then you might want to put money into the IRA as well. These kind of retirement accounts are basically you're basically putting your money into similar investments that you would if they were not under the umbrella of an IRA, typically things like mutual funds, things like stocks and bonds. But if they're under the umbrella of an IRA, they're kind of restricted. So you actually would not do that unless you got a tax benefit because if you didn't have them under the umbrella, you could still invest in in essence the same stuff, but you'd have access to it. The reason you're restricting it by putting it under the umbrella of an IRA is because you get a tax benefit to do so. Meaning you get a tax benefit typically upfront, not having to include that in income or you could think about it as getting a deduction of the amount that you put into the IRA and the earnings of it are deferred until the point in time that you take it out if it's a traditional kind of IRA, which is a huge tax incentive. So if you have access bottom line to a 401K or a 403B and you have the cash flow to put money into it, you'd like to max out as much as you can typically and if you have access to an IRA, same kind of thing. Clearly to do that however, you have to have cash flow, which is obviously a problem for many people, especially in their working, earning years when they got a mortgage and all that kind of stuff, have money to put into the IRA. So in any case, these accounts can be with a bank or other financial institution, a life insurance company, butchery fund or stock broker. Here are some things to know about a traditional IRA, IRA. A traditional IRA is a tax advantaged personal savings plan where contributions may be tax deductible. Generally the money is traditional IRA isn't taxed until it's withdrawn. So that's the point. You're putting money in there, you're not getting taxed on it or on the earnings typically until you actually pull it out. Huge deferral over a long period of time, which is great. There are annual limits to contributions depending on the person's age and the type of IRA. So you can't just put money in there up to whenever you want. There's going to be limits on how much money you can put in there and those limits become more complicated when, say you have the capacity to put money into a 401k plan. The thing that's great about an IRA though, is that oftentimes you have up until the time you file the tax return or until the due date of the tax return, April 15th of the following year, which gives you a few more months to kind of do that last minute planning to see if you can still put money into an IRA, which you kind of have to actually do the tax return sometimes to really know if you could put more money into an IRA if you have a complex situation. So the fact that you have that timeframe after the year end to kind of figure that out is useful. So when planning, when to withdraw money from an IRA, taxpayers should know that when you withdraw, that's when you're going to take the money out of the IRA. They may face a 10% penalty and a tax bill if they withdraw money before age 59 and a half, unless they qualify for an exception. So if you need to pull the money out, this is the problem with the IRA. They're trying to lock the money in so that you're saving for retirement. They're trying to force you to save for retirement. So this is another kind of manipulative tool of the government and it gives us a tax benefit. And so that means that if we try to take the money out, we get penalized at the 10% if we take it out before the retirement because they're trying to force us to save for our retirement unless you have a qualifying reason for the exceptions. You can link to that here if you want to look into those in more detail. Usually they must start taking withdrawals from their IRA when they reach age 72. So for your whole life, you're like, they wouldn't let me touch that money at all. And then when you reach 72, they force you to take it out. So right at the point when you don't need the money, most likely, and you're like, I just want to keep the money in there because I don't want to pay any taxes on it. Now they're like, no, now you have to take it out. So but why do you have to take it out? Because the IRS wants to now say it's enough enough. We've given you a tax deferral for long enough. We want our money so they want you to take it out because that's going to trigger the taxation. You're going to have to pay taxes on the money you take out. Now the sad thing kind of here is oftentimes many people that work at a W-2 type of job for their whole life, for example, and then they retire, oftentimes you may not fully grasp exactly what's going on with all the withholdings because you just filled out a W-4, the employer takes out the withholdings and so on. And then when you start to pull the money out of your 401k or the IRA, for example, it could actually be a little bit more complicated because now you've got to figure out how much you're going to pull out and basically your withholdings are not just being done through the W-4. You've got to actually kind of figure out your withholdings and maybe take a more active role in paying your taxes and stuff. So you've got to kind of plan for that. When you start pulling the money out, you'd like to do so in such a way that you can lower your taxes, possibly pulling some money out of the IRAs or 401k plans as required or as necessary. And it'd be nice if you had some savings elsewhere like in a Roth or some other place so that you can have a lower income threshold that's taxable income and possibly pay less taxes at the time. So for tax years 2019 and earlier, that was age 70 and a half. So special distribution rules apply for IRA beneficiaries. There's a link to that here. Both IRAs are like traditional IRAs but a Roth IRAs are like traditional IRAs but there are some important differences. So the normal IRAs, you get that deferral kind of component, meaning I'm going to pay taxes on it in the future when I take the money out. That's usually good because if you're in your prime earning years, then you probably have your highest income. You're probably subject to the highest tax brackets if the tax brackets stay the same over time. And then when you pull the money out, then maybe you're going to be paying less taxes because you won't be needing as much. You won't be earning as much money at that time. That's kind of the idea. And then you get that deferral kind of component. But you might be saying, hey, what if I'm not earning that much money but I have enough money to put away right now? You might be saying, well, I'm not getting a huge tax benefit to put the money into an IRA at least at this point like right now because my taxes are quite low in terms of the rate. And when I retire, I might have a higher taxes at that point. So you might try to reverse things and do a Roth IRA if you're in that kind of situation. If you're not getting a tax benefit of substantial one from putting into the IRA or you might be thinking, hey, when I retire, I already have money into an IRA. I might want money into a Roth too so I could take money out of both of them maybe and have lower income because some of it might not be subject to taxes. Or you might be thinking taxes are going to skyrocket because the government is spending like crazy and you think that something's got to hit the fan. Some stinky stuff has to hit the fan at some point. And so they're probably going to raise taxes by the time I'm in retirement. In that case, you might want the Roth IRA. So a Roth IRA is another tax-advantaged personal saving plan with many of the same rules as a traditional IRA. But there are exceptions. A taxpayer can't deduct contributions on a Roth IRA so you don't get the tax benefit at the point in time you put the money into the Roth IRA because it's reversed. That's the whole point. So qualified distributions are tax-free. So now when you take the money out, it's tax-free. And you've got the earnings on the money as the IRA was in whatever the IRA was in under the umbrellas, typically stocks, bonds, mutual funds. You take the money out, it's tax-free because you pay the tax when you put it in. Both IRAs don't require withdrawals until after the death of the owner. Roth IRAs don't require withdrawals until after the death of the owner. So you don't have the same kind of situation with the government saying, hey, with the traditional IRA, we would like you to start taking the money out because we want to tax you on it. But now if there's no tax on it because it's a Roth now, you don't have that same kind of pressure. So here are a few other types of IRAs. You've got the saving incentive match plan for employees. That's the simple IRA. Allows employees and employers to contribute traditional IRAs set up for employees. It is suited as a startup retirement saving plan for small employers not currently sponsoring a retirement plan. So if you're a small employee, if you work for a small employer or if you are a small employer, you might be saying, I can't really set up a 401k plan. I'd like to set up something so I can put possibly more money into my own IRA and so that employees can get access to some kind of retirement plan. I don't want to set up a 401k because it's too complicated to manage the 401k. You might choose like a simple IRA or a simplified employee pension. Otherwise known as a SEP, a SEP IRA is set up by an employer. The employer makes contributions directly to an IRA set up for each employee. So that's another kind of small business option that has some benefits for both possibly the owner of the small business as well as the employees of the small business without the burdensomeness of a full 401k plan or something like that, although you don't have as much of all the benefits of the 401k plan either. Roll over IRA. Okay. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days. So if you have money into an IRA and you might say, well, I can't pull the money out. I'm locked in to be doing business with the same place that I put the money in with the IRA. That's not necessarily the case. You could go to another place and roll the IRA over into the other IRA typically. And if it's a rollover, then hopefully that's what the point is. You do not want it to be counting as you took the money out because then you could be subject to the penalties on it and the taxes on it. You want to be saying, no, I'm just rolled it over. I took it out of one IRA, which is under the umbrella of an IRA. I put it into another IRA, which is under the umbrella of an IRA. Don't tax me IRS to get the rollover completed properly. You would like to talk to the person you're rolling over into the company, the financial institution typically, and ask them to help facilitate the rollover such that you will get a 1099 or something that shows it as a rollover and not as a distribution because if it shows it as a distribution, it's going to cause problems. You have this kind of day limit if you were to take the money out and put it back in. But again, what you want to do is kind of make sure that the documentation that it's reporting the rollover shows it as a rollover so that the IRS doesn't get confused. Okay, so more information is at the links below. We got publication 590a, contributions to individual retirement arrangements, publication 590b, distributions from individual retirement arrangements, topic number 557, additional tax on early distributions from traditional and Roth IRAs, topic number 413, rollovers from retirement plans, topic number 451, individual retirement plan arrangements. So there's links to that wonderful reading material here. There'll be a link to this in the description.