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Chapter 4. No Plan Is an Island > Individual Retirement Account Plans

Individual Retirement Account Plans

We have dealt primarily with employer-sponsored defined benefit or defined contribution plans thus far. Now we move into the world of individual retirement accounts (IRAs). IRAs have been part of our retirement fabric since their creation in 1974. IRAs fill the gap where no other retirement plans are available or where you have not maximized your other retirement plan contribution and qualify for an IRA as well. And since IRAs are designed to meet the needs of those without access to other plans, you'll find that these plans do not offer high contribution limits and are generally not available to high-wage earners as the deductibility of deposits gets phased out at the higher-income levels.

Common Mistakes

When people need money, they may have to tap their retirement plan assets, and when they do so, they can avoid the pre-59.5 penalty by taking systematic withdrawals. Unfortunately, many people have made the mistake of misreading the IRS code on these distributions which require that distribution continue for five years or until age 59.5, whichever is later. If you violate this regulation, the IRS will come after you for all taxes and penalties retroactively and cumulatively. Exceptions can include first-time home loans, medical expense reimbursement, and education expenses.



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