Remember the perks of the traditional IRA? Sounds like a dog’s life, right? It can be. But before you jump up and stand on your back legs in excitement, pay attention to Uncle Sam. Ignoring his commands when it comes to the traditional IRA can get you severely reprimanded.
Why? Lots of reasons.
- The option of early withdrawal is tempting. But don’t forget about the 10% early withdrawal penalty if you are younger than 59 ½ years and the 25% penalty if a withdrawal is done within 2 years of establishing the IRA.
- The exceptions for early withdrawal can be complicated to navigate.
- Also, the IRA is an account which can allow a certain amount of control over the type of investments generating income. But be careful. Uncle Sam likes conventional investments, not the sort I always wanted, like sets of soft pillows and squeaky toys. Uncle Sam will penalize you if you use your IRA for things like collectibles, including artwork, antiques, gemstones, coins, and so forth. In other words, if you want to invest in personal property, better be prepared for some fiscal punishment.
- Once you turn 70 ½ years of age, you’re required to take RMDs, or Required Minimum Distributions, from the traditional IRA account, even if you don’t need the money.
- Uncle Sam treats your distributions, your treats, like ordinary income, which is subject to income tax.
When I think of being comfortable and well-fed in my old age, my tongue flops out, and my tail wags. I’m looking forward to getting my distributions. But I have to remember the traditional IRA is like every other financial matter with Uncle Sam. There are always exceptions and what-ifs, and every benefit must be weighed against its potential downside.
Just to be on the safe side, I bark a lot about my traditional IRA to The Boss at Law Offices of Christy Lee, P.C. I want to make sure that Uncle Sam never has a reason to send me to the fiscal doghouse.