Rules and penalties for individual retirement accounts (IRAs) are all set forth by the IRS (Internal Revenue Service). There are a variety of IRA accounts to choose from, with the traditional version setting the standard. Other IRA accounts have variations along with applicable rules and regulations that need to be followed. Penalties may range from having additional taxes assessed to implementing actual account closings.
Contribution Limit Rule
In general, the IRS has rules in place regarding how much you can contribute to any individual retirement account. Any amount in addition to this is considered an excess contribution and may face additional penalties or taxes. For instance, if you own a Roth account, you must not contribute more than either $5,000 (or $6,000 if you are 50 or older) or your taxable compensation. If you do contribute more than this amount, you may have a 6 percent excise tax imposed upon you says the IRS. There are exceptions to this rule that are stated in IRS Publication 590.
Prohibited Transactions Rule
If you partake in a number of activities, or transactions, the IRS has rules in place to penalize you. According to IRS terminology, a prohibited transaction is using your IRA account or annuity in an improper manner. The transaction could be done by your beneficiary, you or any disqualified person says the IRS Publication 590 (Individual Retirement Arrangements (IRAs)).
Some transactions that are classified as prohibited under this rule include using your IRA as a security for a loan, borrowing any money from it, using its funds to buy property for your personal use, or selling property to it. If you manage your individual retirement account, you cannot receive fees that are considered unreasonable in nature.
The IRS will penalize you for taking part in any prohibited transactions involving your IRA by closing your individual retirement account as of the first day of the year. This also applies if your employer or association were involved in the transactions with you.
Collectibles Rule
The IRS has a rule in place stating that if your traditional individual retirement account invests in collectibles, any amount you invest during the year is considered a distribution. Your investment may be treated as an early distribution involving a 10 percent tax (which is a penalty). Collectibles include items like metals, gems, stamps, artwork, rugs, antiques and coins. An exception to this rule involves U.S. gold and silver coins minted by the Treasury Department, says the IRS.
Age Rule and Penalty
The IRS has rules in place regarding your age. Once you reach the age of 70 1/2, you are required to make a minimum withdrawal from your individual retirement account. This withdrawal must be made before April 1 of the year following your birthday. Also, you may face a penalty in the form of additional taxes if you withdraw any funds from your account prior to reaching the age of 59 1/2.
References
- J.K. Lasser's Your Income Tax 2009; Barbara Weltman; 2008
- IRS: Publication 590
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