![]() ![]() “Current law provides for a nonrefundable credit for certain individuals who make contributions to IRAs, employer retirement plans… This provision would modify the credit with respect to IRA and retirement plan contributions by changing it from a credit paid in cash as part of a tax refund to a government matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. That penalty reduction would be effective right after the bill was enacted.Īnother provision would provide for a government match of some IRA and retirement plan contributions. And if the distribution was taken within a correction period, the penalty would be further reduced to 10%. The bill would also reduce the penalty for failing to take a required minimum distribution from 50% to 25%. Legislation making its way through Congress with bipartisan support would reform retirement savings in the U.S., including the rules governing IRAs.Īmong the notable provisions of the Enhancing American Retirement Now (EARN) Act is an increase in the age for mandatory distributions to begin, which would raise the age of the first distribution from 72 to 75, effective after 2031. If you do exceed it, the IRS might hit you with a 6% excessive-contribution penalty. One more note: If you invest in both a traditional IRA and a Roth IRA, the total amount of money you can contribute to both accounts can't exceed the annual limit of $6,000 ($7,000 if 50 or older). If you can afford to contribute the full $6,000 in 2022 without the help of the tax deduction (which reduces the out-of-pocket cost of a $6,000 contribution to just $4,680 for someone in the 22% bracket) you may be better off saving for retirement in a Roth IRA. The amount that can be contributed to a Roth IRA is subject to income limits. Also, Roth IRAs don't have required minimum distributions. The earnings can also be withdrawn tax- and penalty-free once you have owned the Roth for five years and you're at least age 59 1/2. Money instead goes into a Roth IRA after taxes have been paid on it, and you can withdraw contributions at any time free of taxes or penalties. The tax rules differ for contributions to a Roth IRA, which aren't tax-deductible. You will also be obligated to take required minimum distributions (RMDs) after you turn age 72, so you won't be able to avoid the IRS forever. On top of that, if you take the money out before turning 59 1/2, you can be hit with a 10% penalty. Your withdrawals will be subject to ordinary income tax. For instance, this could include those who will retire soon and believe their income will be less.Įventually, you will have to pay taxes on your traditional IRA. Traditional IRAs are best for people who are looking for an immediate tax deduction or believe their tax bracket will be lower in the future. You can open a traditional IRA through a bank, brokerage, mutual fund or insurance company and invest your IRA money in stocks, bonds, mutual funds, exchange-traded funds and other approved investments. ![]()
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