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  • Writer's pictureHarry N. Stout

291- Do You Know These 9 Important Aspects of IRAs?

In this post, I am going to talk about the important aspects of tax-favored IRAs and how you can use this tool in your retirement planning. Like any tool, it should only be used when it is appropriate. In prior posts, I have emphasized that you should look to take advantage of tax- advantaged tools that Congress has provided to help you save and invest for when you stop full-time work. IRAs can be a powerful retirement-savings tool, but they come with contribution limits, investment restrictions, required minimum distributions at older ages, rules for beneficiaries and other restrictions and requirements.

What is an IRA?

An individual retirement account (IRA) is a savings account designed to encourage people to save for retirement with tax advantages that individuals can use to save and invest long-term. Anyone who has earned income can open an IRA and enjoy the tax benefits these accounts offer.

You can open an IRA through various sources including a bank, insurance company, an investment company, an online brokerage or a personal broker.

Here are some of the key characteristics of IRAs:

  • IRAs are retirement savings accounts with tax advantages.

  • There are a several different types of IRAs including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.

  • Money held in an IRA usually can't be withdrawn before age 59½ without incurring an early withdrawal tax penalty of 10% of the amount withdrawn.

  • There are annual income limitations for deducting contributions to traditional IRAs and for contributing to Roth IRAs.

  • IRAs are meant to be long-term retirement savings accounts. If you take money out early, you defeat that purpose by diminishing your retirement assets.

  • To learn more about IRAs you can go to the Internal Revenue Website at

Here are some important aspects of IRAs:

1. Tax-deferral can increase your retirement savings. A traditional IRA can be a great way to increase your retirement savings by not paying income taxes while you're building your savings. Congress has given you this tax break now when you put in deductible contributions. In the future, when you take money out of the IRA, you pay taxes at your ordinary income rate. Each year you earn a return on the taxes you do not pay currently to help you accumulate more money.

2. There are annual IRA contribution and income limits. Each year the IRS publishes new income restrictions and contribution limits for IRAs. There is an annual limit on how much you can contribute to an IRA. For 2022, the cap is $6,000 for an individual. People 50 and older by the end of the year can stash away an extra $1,000. You need to check these restrictions to determine how much, if any amount, you can contribute to a tax-deductible IRA.

3. You have until the due date for filing your tax return to make your contribution.

The deadline for making contributions to your IRA is the due date for filing your tax return. For example, if you didn't contribute to your IRA in 2021, you can still stash up to $6,000 ($7,000 if you’re 50 or older) for 2021 in a traditional IRA by April 18, 2022. And if you want, you can contribute money for this year to your IRA at the same time.

4. You can make contributions to both an IRA and a 401(k) subject to income restrictions.

You can contribute to both your 401k plan at work and into an IRA. However, the tax deduction for IRA contributions is phased out for single filers covered by a workplace retirement plan who have modified adjusted gross income between $68,000 and $78,000 in 2022. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $109,000 to $129,000. For an IRA saver who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $204,000 and $214,000.

5. You can make nondeductible contributions to an IRA. If you don't qualify to deduct your IRA contributions, you can still put away money up to the annual limit in a traditional IRA. But be aware that making nondeductible contributions to an IRA will complicate your tax filing when it comes time to withdraw funds from your IRA.

6. There are restrictions if you transfer money into an IRA. When they change jobs or retire many people roll their 401(k) or other defined contribution plan into a traditional IRA. Please get some advice on how best to make the transfer to avoid creating an unwanted tax bill. There are specific rules for how and when to make these transfers. If you don’t follow these rules, you could be subject to a large bill.

7. Early withdrawals from an IRA are allowed. As we have discussed, Congress created IRAs to help Americans save for retirement. That is why there are early withdrawal taxes for taking money out before age 59 ½. If you need to gain access to your money at younger ages, please check to see if you can avoid paying taxes by looking at the exceptions the IRS grants for early withdrawals. Some of these exceptions include using money to pay the costs of a first-home purchase or unreimbursed medical expenses.

8. You must take withdrawals from your IRA at older ages. Some people have more than sufficient sources of retirement income and savings and do not want to take money out of their IRAs. Unfortunately, Congress anticipated that this might happen and has mandated that you must withdrawal a certain amount from your account each year or be subject to significant penalties. These “required minimum distributions” as they are called must be taken.

The minimum amount you have to take out is determined by balance on all your qualified accounts and your age. The older you are, the larger the percentage of the balance you'll have to take out. But just because you have to take a distribution doesn't mean you have to spend the money. You can do with the withdrawal as you please.

9. There are new rules concerning who you can leave your IRA to if you die and how they must take money out of the inherited account. When you open a traditional IRA, you can name both primary and contingent beneficiaries. Your IRA beneficiary designations will override any instructions in a will. But the rules for managing an IRA inheritance are different for spousal heirs and non spousal heirs. Please seek advice from your tax professional about how best to position your account upon your death.


The creation, management and use of IRAs can be complex. You need a basic understanding of this retirement savings tool and how it can be used in your retirement plan. I suggest you take some time to understand the key aspects of IRAs. The time invested could save you money and improve your non-working lifestyle. If you have questions, please consult your tax advisor to avoid unnecessary income taxes and penalties.


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