Knowing these 10 IRA tax tips can enable you to take advantage of all of the tax laws available when saving for retirement. When preparing taxes and setting up retirement accounts, it's important to know how your IRA or individual retirement arrangement affects your tax return. Being knowledgeable will allow you to make smart decisions when contributing to an IRA and how to handle the account in the future until you request disbursement at retirement.
Use these ten IRA tax tips to make smart decisions regarding your retirement future:
- Money contributed to a traditional IRA is not taxed until disbursement. Not including Roth IRAs, the person who owns a traditional IRA is not taxed until they request money from the IRA during retirement. Usually, the person's tax bracket is lower during retirement, saving the person money by waiting to pay taxes until they are retired.
- IRAs can only be owned by one person. When the person owning the IRA dies, a beneficiary can be awarded any portion of the monies in an IRA that remains.
- Use the correct form. When making nondeductible contributions to a traditional IRA, the taxpayer has to use Form 8606, Nondeductible IRA's.
- Know if you are eligible for a tax credit. Use form 8880, Credit for Qualified Retirement Savings Contributions to find out whether you qualify for a tax credit.
Persons must be 70-1/2 years old at the end of that tax year to contribute to a traditional IRA.
- To be eligible to contribute to a traditional IRA, the person who takes out the IRA or their spouse must have taxable income from specific sources. Income can come from a salary, wages, self-employment income, tips, commissions, or bonuses. Also included are taxable alimony and maintenance payments that the owner of the IRA received during the tax year. Income that does qualify includes deferred compensation, rental property income, pension or annuity compensation, and dividend and interest income.
- Contributions to an IRA can be made up till the tax filing date. You can contribute for the applicable tax year (the previous year) until April 15.
- Funds withdrawn from an IRA are taxable the same year they are withdrawn. Withdrawals of only deductible contributions are fully taxable.
Early withdrawal may be taxable. Owners of traditional IRAs who withdraw monies before they are 59-1/2 years old may have to pay an additional ten percent tax.
- Late withdrawal may be taxable. Owners of traditional IRAs who do not withdraw the minimum amount after they turn 70-1/2 may owe an excise tax.
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