Everything You Must Know About IRA Rules
IRA accounts have rules.
Traditional IRA’s , Roth IRA’s and Simple IRA’s have some similar rules and some different ones.
Learn the rules. Knowledge of these rules could save you money in taxes and penalties. IRA accounts have eligibility rules, distribution rules, contribution limit rules, withdrawal rules and taxation rules.
If you don’t follow the rules, you could be paying more in taxes and penalties. Let’s review the rules:
IRA Account Rules
IRA Eligibility Rules
Traditional IRA’s
- Earned Income rule.
- Age 70 1/2 rule.
- Your IRA payment must come from some type of “earned income”.
- Earned income can be: wages, salaries, commissions, tips or bonuses.
- Your IRA payment cannot come from an inheritance.
- Inherited money is not considered earned income by the IRS.
- You must be under age 70 ½ to open an IRA account.
Roth IRA’s
- IRA payment must be from “earned income”.
- No age limit rule.
Simple IRA’s
- As an employee, to be eligible to contribute to a Simple IRA, you must have received at least $5,000 in earned income in the past 2 years, and at least $5,000 in current year.
- Employer’s have to meet 2 eligibility requirements.
- First, the employer cannot offer any other type of qualified retirement plan (ie, 401k, pension).
- Second, the employer must employ 100 employees or less.
IRA Contribution Rules
Traditional IRA’s
- For 2010, the maximum contribution limit is $5,000.
- If you are over age 50, you can make an extra contribution, this is the catch up contribution.
- For 2010, the catch-up contribution is $1,000.
Roth IRA’s
- For 2010, the maximum contribution limit is $5,000.
- For 2010, the catch-up contribution is $1,000.
Simple IRA’s
- For 2010, the maximum contribution limit is $11,500.
- The catch-up contribution limit for 2010 is $2,500.
IRA Distribution or Withdrawal Rules
Traditional IRA’s
- 59 1/2 rule.
- Required Minimum Distribution Rule.
- You cannot start your IRA distribution until age 59 1/2.
- If you withdraw from your Traditional IRA before age 59 1/2, you will be taxed and pay a 10% early withdrawal penalty.
- You must begin taking minimum distributions by age 70 1/2.
- Your required minimum distribution is calculated using your life expectancy.
Roth IRA’s
- 5 year rule.
- No Required Minimum Distribution Rule.
- After your Roth IRA has been opened for 5 years, you can start to make a qualified distribution, as long as you are over age 59 1/2.
- If you withdraw and are under age 59 1/2, you will be taxed and incur tax penalties.
- You may make a withdrawal if you are a first-time-home buyer.
- You may also make a withdrawal if you become disabled.
Simple IRA’s
- Same rules as a Traditional IRA, 59 1/2 rule.
- You cannot start your distribution before age 59 1/2 without incurring taxes and penalties.
- A 2 year rule.
- If you take an early distribution within 2 years of making your first contribution to your Simple IRA account, the early withdrawal penalty is 25% not 10%.
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