How to Follow the IRS Rules for IRAs

IRAs can be easily set up when you have the assistance of a professional. This person, usually a retirement specialist, personal banker or estate planner, knows to follow IRS rules regarding IRAs. The IRS rules about what can and cannot be done with IRAs can seem complicated. These experts determine who can open which IRA accounts, when money can and should be withdrawn and how the funds are taxed.

Difficulty: Easy

Instructions

Things You'll Need:

• IRS Publication 590
• Knowledge of IRS rules for IRAs

1. Confirm that you are eligible to open an IRA account. You may have an IRA as long as you earn an income. For certain types of accounts, such as the Roth IRA, you must belong to a specific income bracket.

2. Name a person, not a corporation or charity, as your designated beneficiary. The IRS calls this a "natural person."

3. Adhere to the maximum yearly contribution limit allowed for your IRA. The IRS will penalize you when you file your income taxes if you do not follow these guidelines.

4. Invest only in IRS-approved products when choosing your IRA portfolio. The IRS does not allow collectibles or coins that are not legal tender. Mutual funds, stocks, bonds and real estate are some of the investments that are legal.

5. Report your IRA earnings, contributions and distributions on the appropriate tax forms each year. IRS Publication 590 discusses all of the rules about IRAs and includes sample forms (see Resources below).

6. Wait until you are at least 59 1/2 years old before you withdraw money from your IRA. According to IRS rules, this is the earliest age at which you can receive disbursements without paying an early withdrawal penalty of 10 percent.

7. Take your minimum required disbursements when required by your account type. The IRS states that you must start to draw from your traditional IRA account at age 70 1/2 years. Roth IRAs, though, are exempt from this rule.

Tips & Warnings

• There are both tax-deductible and nondeductible IRA accounts, as well as traditional and Roth IRAs. If you earn more than a certain amount of money per year, you may not be eligible for certain accounts. Discuss with your retirement planner which account is right for you and your beneficiaries.
• Contribution limitations are set by the IRS each year and adjust with inflation and changes in tax law.

Resources

• IRS Publication 590