When you’re an IRA owner, there are rules and regulations that all retirement savers have to follow. The rules do vary a little depending on the type of account, but many laws are the same across the board. Here are a couple.
Early withdrawalsWithdrawing funds from your IRA before age 59½ will cost you a 10% penalty, plus income tax on the amount attributable to previously deductible contributions, and earnings. There are some exceptions to this rule under Internal Revenue Code including:
- The disability or death of the IRA owner
- Withdrawn funds are used for a first-time home purchase (subject to a lifetime limit of $10,000)
- Withdrawn funds are used to pay for unreimbursed medical expenses that exceed 7.5% of AGI
- Withdrawn funds are used to pay for the qualified higher-education expenses of the IRA owner and eligible family members
Even if you can avoid the 10% penalty, you will still pay taxes, at least if your IRA is not a Roth IRA, which is taxed before entering your IRA. More importantly, with less money in your account, you will be leaving less money to earn compound interest. Since you can only contribute a set amount to these accounts annually, so you may not be able to make up for the lost funds.
Prohibited investmentsIf you personally manage and invest your own retirement through a self-directed IRA, be aware that IRA rules prohibit investing in collectibles, which include the following:
- Metals - other than gold, palladium and silver
- Works of art
- And alcoholic beverages (although, note that investing in a winery or brewery IS allowed, just not the direct ownership of alcoholic beverages, such as a wine collection)