Both traditional and Roth individual retirement accounts include tax benefits and requirements for senior citizens. IRA rules include age restrictions for making withdrawals and tax consequences when withdrawing funds early. Taxation on traditional IRAs varies, depending on whether you contributed pre-tax or post-tax funds, and Roth IRAs offer tax-free withdrawals. You may also face tax liabilities if you roll over traditional IRA funds to start a Roth IRA, or if you fail to make required minimum withdrawals after reaching a specific age.
IRS regulations stipulate that you cannot make a normal withdrawal from any IRA before reaching the age of 59-1/2. Under most circumstances, you face tax consequences for early withdrawals. However, you may qualify for an early withdrawal prior to age 59-1/2 if you are disabled. If an IRA owner dies and names you as the beneficiary, you may also qualify for penalty-free early withdrawals. According to the IRS, you may face excise tax penalties of up to 10 percent if you make an unqualified withdrawal before the minimum allowable age. You can avoid the excise tax penalty if you deposit early withdrawal funds into another IRA within a 60-day period.
Traditional IRA Taxes
Tax requirements on traditional IRAs depend on the type of contributions you made to your account. If you chose to deposit only pre-tax funds, you must pay taxes on the entire amount of withdrawals. However, if you made nondeductible contributions to your traditional IRA, funds for which you previously paid taxes, you must only pay taxes on earnings made on your investment. The IRS also requires you to make minimum withdrawals from traditional IRAs when you reach the age of 70-1/2. If you fail to make minimum withdrawals, you may face excise tax requirements of up to 50 percent.
Roth IRA Taxes
If you own a Roth IRA, you cannot take a tax deduction when you make contributions to your account. However, Roth IRAs offer tax-free withdrawals, as long as you meet age requirements and hold the IRA for five years or more before taking out funds. IRS rules for opening Roth IRAs require you to meet income limits and only allow you to deposit specific amounts of money each year.
If you roll over funds from a traditional IRA into a Roth IRA, you typically face tax liability. To roll over funds into a Roth IRA, you must first withdraw funds from your traditional IRA. If your traditional IRA yields earnings on your investment, you must report the earnings as income. However, starting in 2010, the IRS began allowing you up to two years to pay taxes on income received during an IRA conversion. This enables you to divide your earnings equally, so you do not face the entire tax burden in a single year. You can, however, pay taxes on the entire amount of earnings in one year if you choose. Once you pay the conversion taxes, the IRS does not require any further taxes on the rollover funds.
- Smart Money; Retirement Math-Taxes on IRA Withdrawals; Bill Bischoff; November 2010
- Kiplinger; Taxes on 401(k) and IRA Withdrawals; Kimberly Lankford; May 2008
- Fidelity Investments: IRA Withdrawals-IRA Tax Implications
- IRS: Publication 590-Traditional IRAs
- IRS: Publication 590-Roth IRAs
- IRS: Topic 451-Individual Retirement Arrangements (IRAs)
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