Most Confusing Parts Of The Income Tax Code, Part 3: Retirement Accounts

Many provisions of the Internal Revenue Code are complicated. Proper interpretation of the rules and regulations contained in these provisions requires the assistance of an experienced and knowledgeable tax professional. The third part of our series about the most confusing provisions of the Internal Revenue Code addresses retirement accounts.

There are over a dozen different tax-advantaged retirement savings accounts, each with its own set of rules governing contributions, distributions and when money may be withdrawn without incurring any penalties.

Why Is It Confusing?

  • There are a large list of incentives from which to choose
  • Each set of incentives has distinct, special rules

There is inherent confusion just in distinguishing between traditional IRAs and Roth IRAs. Taxpayers may deduct the total amount contributed to a traditional IRA and it will grow on a tax-deferred basis, thus incurring no capital gains tax. Once withdrawals of money in the IRA commence during retirement, they are taxed, Withdrawals prior to age 59 1/2 are also subject to a ten percent penalty.

In contrast, a Roth IRA is the opposite of a traditional IRA as taxpayers may not deduct contributions, but withdrawals during retirement are tax-free. Like traditional IRAs, there is also no tax on capital gains, but early withdrawals are also subject to a ten percent penalty.

It’s also confusing to sort out the rules of IRA contributions related to age. Taxpayers over the age of 50 have different contribution limits than those under age 50, and may make greater contributions to traditional IRAs, Roth IRAs, and 401(k)s. While Traditional and Roth IRA contribution limits are $5,500 for taxpayers under the age of fifty (50), persons age fifty (50) and over may make additional contributions of $1,000, for a total contribution limit of $6,500. Taxpayers may have both a Roth IRA and a Traditional IRA in the same tax year, but can’t exceed the contribution limit with combined contributions to both accounts.

Also, miscellaneous expenses incurred in earning investment income are deductible to the extent that they and other itemized personal deductions exceed 2% of adjusted gross income (AGI). These types of expenses would include attorney and accounting fees, subscriptions to investment newsletters, fees paid to a financial planner, broker, bank, trustee, or similar agent to collect investment income. Tracking and calculating such expenses is yet another arduous and time-consuming process.

The general rule for retirement accounts is that taxes must be paid on the money prior to placing it into the account, or when the money is withdrawn. If you are retired and wish to take advantage of all of the tax benefits for those over fifty (50), call THE TAX EXPERTS at the Thorgood Law Firm For a FREE consultation, call 212-490-0704.Most Confusing Parts Of The Income Tax Code, Part 3: Retirement Accounts

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