When most people hear about IRAs they will often associate them with all of the advantages they can receive from owning these particular accounts. However, what they do not think about are the possible penalties that can be assessed against them for not following various regulations. At which point, they are surprised at how they could be penalized for the consequences surrounding a lack of knowledge in these areas. To avoid these kinds of situations requires understanding how the different rules apply to you. This is when you will be able to maximize your overall return by comprehending the way that these regulations apply to your situation.
For any kind of IRA there are a number of different penalties that can be assessed against you to include: early distributions, excessive contributions and not taking the required mandatory distributions. These elements are important, because they are the most common areas that the majority of investors will encounter at some point.
Early distributions are when someone under the age of 59 ½ is taking money out of their account. This can result in a 10% penalty being levied against this amount if it does not fall under an exemption. These include: the purchase of home, non reimbursed medical expenses, paying for medical insurance, covering the costs associated with college, someone who is called to active duty and IRS levies. Anything that does not fall into these various categories will be assessed a 10% charge when the distribution is requested. This is important, because understanding these stipulations will help you to avoid having a penalty on any amount that does not qualify.
In 2011, the maximum contributions that can be made to IRAs are: $5,000.00 for anyone under the age of 50 and $6,000.00 for those above this age group. Anyone who adds more than this amount to their IRAs will be assessed a 6% tax (if it is not taken out by April 15th). This is significant, because it is illustrating how everyone must ensure that they are staying within these guidelines at all times.
Not Taking the Required Mandatory Distributions
At the age of 70 ½ is when most IRAs will require you to begin taking mandatory distributions. The only exception is for Roth IRAs. Those who fail to do so with the other types of accounts, will be assessed a 50% penalty on this amount. For example, if someone does not take their mandatory distribution in their Traditional IRA of $6,000 (with them only withdrawing $4,500). They will be assessed a penalty of $750.00 ($1,500.00 x 50%). This is important, because understanding this regulation will ensure that you can avoid losing funds in your IRA unnecessarily.
Clearly, there are a number of different regulations that apply to IRAs. Knowing them and how they relate to your situation will help you to avoid excessive penalties. This is the point that you will be able to maximize your returns by understanding what specific rules are relevant and when you need to begin certain activities with these accounts.