When it comes to personal finance, taxes are a consideration that many people give little thought. However, taxes are one of the biggest bills that most people will have. That’s why it’s important to avoid paying attention to some of the leading IRS myths. They can lead to major costs for many people.
You Can’t Contribute to an IRA without a Job.
Single adults do need to have a job in order to contribute to an IRA. This is not the case for nonworking spouses. Those who have an employed spouse can contribute the maximum regardless of their income situation. This could allow for a reduction in the amount of taxes that a family needs to pay.
You Can Leave Your Money in an IRA Indefinitely.
While it’s possible to leave money in a Roth IRA indefinitely, it is not the case for traditional IRAs. Those who’ve invested through a traditional IRA will need to start taking retired minimum distributions beginning at age 70 1/2. The amount that will need to be withdrawn will go up each year because the government wants to access the tax revenue at some point. Roth IRAs are exempt because the tax has already been paid.
You Make Too Much Money to Contribute to an IRA.
There are income limits for contributing to a Roth IRA. Single taxpayers who make more than $137,000 will not have an opportunity to contribute to a Roth account. This is not the case for those who contribute to a traditional IRA. There is no income limit. Therefore, a taxpayer who contributes will see their tax bills go down because their adjusted gross income will be lower.
You Have to Wait until 59 1/2 to Make Withdrawals.
There is a widespread belief that it’s impossible to withdraw money from an IRA before 59 1/2. This is not the case. Anyone can withdraw money from a traditional IRA at any time. It’s just necessary to pay regular income taxes and a penalty of 10% on the amount of the withdrawal. There is also the opportunity to withdraw substantially equal periodic payments, also known as SEPPs. These withdrawals need to continue for five years or until an account holder hits 59 1/2. Those who contribute to Roth IRAs can withdraw contributions at any time.
These myths might cost money over the long run. People who buy into them might pay higher taxes because of a fear of contributing to an IRA. Over a period of years, this could cost a future retiree thousands.