5 Common IRA Myths
By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
IRAs are complicated, even more so if you believe one thing, but the opposite is true. Believing these myths can, in some instances, bring taxes, penalties and hardships you don't want to face. Always work with a competent, educated financial advisor to steer you in the right direction. Go here to find one in your area.
- There are hardship distributions from IRAs that are income tax and penalty free. There are actually no hardship distributions from IRAs. You can generally take a distribution any time you want, for any reason (some investments might limit your ability to take a distribution). Distributions of pre-tax amounts will always be taxable no matter how dire your circumstances. If you are under age 59 ½, they will also be subject to the 10% early distribution penalty, unless an exception applies.
- I can take a required minimum distribution (RMD) from any retirement account that I have. While you can take an IRA distribution from any IRA that you own, you cannot take an IRA distribution from a different type of retirement account. A 403(b) RMD must come out of a 403(b) account, a 401(k) RMD must come from each 401(k) plan, and an IRA RMD must come from your own IRA account.
- The IRA custodian will keep track of the after-tax amounts in my IRA. You must keep track of the after-tax amounts (basis) in your IRA. The custodian has no way of knowing whether or not your contributions or rollovers are after-tax amounts. You must file IRS Form 8606 with your tax return in any year that you add after-tax funds to your IRA. You must also file the form in any subsequent year in which you take a distribution from any of your IRAs. All distributions will be pro-rata, part pre-tax funds and part after-tax funds. Form 8606 has the formula for doing the pro-rata calculation.
- I have a self-directed IRA. My custodian will make sure that I do not make any mistakes in my investments. The name says it all – self-directed IRA. You are solely responsible for the investments in the IRA. The custodian will not be looking over your shoulder to tell you what you can and cannot do in the account. They have NO liability for mistakes you make.
- I contribute to my 401(k) at work so I can’t make an IRA or Roth IRA contribution. You can make IRA contributions even if you contribute to your employer plan. However, there are income limits that could limit your ability to deduct those IRA contributions. For Roth IRAs, there are income limits that limit your ability to make a Roth IRA contribution. Here are the income and contribution limits for 2015.
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