Understanding Taxes on Your IRA
When you open an IRA, make sure you are smart about who you list as the beneficiary. This may not help you after you are gone, but it is definitely a big deal to those you leave behind. If somebody other than a spouse is the heir, they must begin to take distributions by December 31 of the same year. That being said, they can draw money over the long term to ensure years of income free growth.
For IRAs and 401(k)s, earnings and contributions may grow tax-deferred, but distributions are fully taxable. If withdrawals are made after the age of 59½, they are free of penalties. If you have an IRA or 401(k) account, you must begin making withdrawals by April 1st of the following year after you turn age 70½ ? you must also pay taxes on these distributions.
For Roth IRAs and Roth 401(k)s, however, there are no minimum distributions. You may also make tax-free withdrawals from Roth accounts that have been owned for at least five years, if you are at least 59½ years old.
Note: The Worker, Retiree, and Employer Recovery Act of 2008 suspends the rules for required minimum distributions (RMDs) from certain qualified retirement accounts for the year 2009 only.
Tax Form 5498 is used to report contributions on IRAs, which include traditional and Roth, as well as Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP).
Many people are under the impression that they need Tax Form 5498 in order to file their final return. This tax form is for informational purposes only, and is not to be sent to the IRS along with your tax return. IRS regulations state that these tax forms must be sent to contributors by no later than May 31st of the next year. For this reason, most people have already filed their final return.
If you are not participating in a plan sponsored by your employer (such as a SEP IRA, SIMPLE IRA, or other qualified plan), the contributions that you make to your Traditional IRA are generally tax-deductible. If you do participate in an employer-sponsored plan, the deductibility of your contributions is based on your modified adjusted gross income (MAGI) and your tax filing status.
If you inherit an IRA, do not do anything until you know the rules and potential inheritance tax that governs your situation. For instance, did you know that you have to re-title the IRA unless you inherited it from a spouse? A spouse is in the best position in terms of withdrawals and avoiding inheritance tax. A spouse can roll an inherited IRA into his or her own IRA and in turn postpone distributions until turning 70.5. Like other IRA owners, the spouse may have to pay a 10 percent withdrawal penalty should they want to access the money in their own IRA before 59.5. To protect against this, it makes most sense to wait until after becoming 59.5 to rollover the funds.
For more information about taxes and IRAs, please visit the following websites: