Key Takeaways
- IRS Publication 590 provides detailed information on the tax implications of Individual Retirement Accounts (IRAs) such as contribution limits and required minimum distributions.
- Traditional IRAs allow tax-deductible contributions, but there are annual limitations and exceptions.
- Roth IRAs are similar to traditional IRAs but contributions are generally not tax-deductible, and qualified distributions are typically tax-free.
- Required minimum distributions are mandatory for traditional IRAs, starting at age 72, but do not apply to Roth IRAs.
Introduction
IRS Publication 590 provides extensive information on the tax implications of Individual Retirement Accounts (IRAs). The publication explains the various types of IRAs you can use for investing and how each can potentially save you money in income tax. The information most relevant to most taxpayers includes IRA contribution limits and how to calculate required minimum distributions. If you don’t understand these two important pieces of information, it’s possible to ruin the inherent tax benefit of your IRA.
Discussion of traditional IRAs
The first section of IRS Publication 590 provides a lengthy discussion of traditional IRAs. The contributions you make to a traditional IRA can be tax-deductible, although there are some exceptions and annual limitations.
For example, for 2024 the IRS allows you to claim a deduction for up to $7,000 ($8,000 if you are 50 or over) in contributions you make to a traditional IRA. This maximum contribution is subject to change over the years; however, the IRS updates Publication 590 regularly to reflect the most recent tax law changes.
The publication also covers the tax rules when inheriting an IRA, IRA rollovers, converting a traditional IRA to a Roth IRA, taxation of withdrawals and actions that could result in additional taxes or penalties, such as making a non-qualified withdrawal before you reach the age of 59 ½.
Discussion of Roth IRAs
The second section of IRS Publication 590 focuses on Roth IRAs. Roth IRAs are similar to traditional IRAs but with some important differences in the tax treatment. Unlike a traditional IRA, contributions to a Roth IRA are generally not tax-deductible.
However, if you follow the regulations outlined in this section of Publication 590, most qualified distributions from a Roth IRA are tax-free. Publication 590 outlines the contribution limits to a Roth IRA, conversions and rollovers to and from a Roth IRA, and the taxation rules for distributions.
TurboTax Tip:
SIMPLE IRAs are a retirement plan established by small employers, similar to a 401(k), with defined contribution limits and distribution requirements.
Required minimum distributions
An important topic covered by Publication 590 is the required minimum distribution rules you are required to adhere to. In essence, the rules require you to begin making withdrawals from your traditional IRA once you turn age 72, or 73 if you reach age 72 after December 31, 2022 (required distributions were suspended in 2020). The IRS also requires that each withdrawal be a certain amount based on your life expectancy and the current value of your account. If you venture into Appendix C of Publication 590, you will find tables that you can use to compute your life expectancy for distribution purposes. Note, however, that these distribution rules are not applicable to your Roth IRAs.
Discussion of SIMPLE IRAs
The third section of IRS Publication 590 provides information on SIMPLE IRAs. The SIMPLE IRA, also known as the Savings Incentive Match Plan for Employees, is a retirement plan that can be established by small employers for the benefit of employees or for self-employed individuals.
Publication 590 explains that a SIMPLE IRA is similar to a 401(k) plan in that an employer deducts contributions from employees’ paychecks and deposits them directly into the retirement account. The employer also has to make matching contributions to the plan for the benefit of the employee. Publication 590 defines the contribution limits to SIMPLE IRAs as well as the distribution requirements, which are similar to the rules that apply to traditional IRAs.
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