Investment Retirement Accounts (IRAs) were created by congressional action in 1974 through the Employee Retirement Income Security Act of 1974 (ERISA). The law was enacted in order to establish the rules around employee benefit plans and individual retirement accounts.

The complexities and nuances related to IRAs are enough to fill a Ph.D. program.

IRAs are tax shelters in which individuals can deposit and invest money. While there is no minimum annual contribution amount, there is a maximum. The return on the investments, such as dividends, interest, and capital gains, are not subject to taxation while held in the account or until distributed. Therefore, IRAs are excellent savings vehicles for retirement, as they were intended to be.

Twenty-year-olds who maximize their annual contributions until they turn 70 ($5,500 contribution until age 50, $6,500 afterward) and earn a 5% tax-free return compounded annually for 50 years, would have a nest egg totaling $1,184,478 by age 70. This is the power of compounding.

While some have feared in the past that this “tax shelter” would become taxed or be taken away by the government, it has served millions of Americans well. At the end of the second quarter of 2016 close, Americans had invested about $7.5 trillion invested in IRAs. Economists for decades have fretted that citizens are not saving enough for their golden years, especially given the clouds over the long-term outlook for Social Security entitlements. But for many, the complexity of saving has become overwhelming.

The many rules for IRAs do fill volumes. Here is only a small sampling of IRA traps, do’s and don’ts, and ways avoid penalties and taxes.

First, in order to maximize the benefit of an IRA, contributors should put money in each year like they would in a piggy bank. However, they should not take money out until they are required to as any amount taken out will be reported and generally taxed at the highest income tax rate. That tax is due in the year that IRA owners take the money out. Hence, no tax shelter is forever.

Eventually, at age 70 ½, contributors must start taking money back out of their IRA piggy bank to pay taxes on the accumulated pot of gold. Indeed, there is no such thing as a free lunch. This mandate is called the required minimum distribution, or RMD. At year 70 ½, contributors must take a minimum annual distribution to be calculated and fully taxed. After reaching retirement age, funds may be taken in full at any time. Contributors, however, will have to pay all the taxes they had hoped to evade.

Moving IRAs from one investment company to another is also a pitfall to avoid. If an IRA owner does decide that the grass is greener elsewhere, it is generally not advisable to put the IRA balance into a checking account before setting it up with the new investment company. In doing so, contributors could end up paying taxes on the full amount.

New Department of Labor fiduciary rules, set to be implemented in July 2019, will make it more difficult for investment advisors to solicit contributors to move IRAs to a different investment company. These IRA rollovers have generally been a lucrative practice for advisors, and once the law goes into effect they will have to prove that they are doing so in the best interest of the client.

Another recent and significant change to the 1974 law made permanent, as of 2015, the ability to transfer up to $100,000 annually directly from an IRA to a qualified nonprofit organization or charity. That is one way – if you can afford it – to avoid those inevitable taxes on your IRA.

A big caveat for all IRA owners is to be aware that the individual listed on the IRA beneficiary designation form receives all funds when an IRA owner dies – not the person listed in the owner’s will. IRA contributors should, therefore, carefully review and update the beneficiary designation form so as to avoid the “wrong person” reaping the benefits of a hard-earned IRA.

It is also not advisable to make a trust or an estate an IRA beneficiary. In most cases, IRAs can only be inherited by people, not legal entities. That mistake could be costly to an owner’s heirs as the IRA could become fully taxable at the time of the owner’s death if an entity is named as the beneficiary. Again, it serves to double-check and update those beneficiary forms.

These are merely a speck of the details that go with the IRA savings vehicle. My message: Get one if you can. And if you don’t want to get a Ph.D. in IRAs, get yourself a good accountant.

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Jeanie Wyatt

Jeanie Wyatt is the founder, chief executive officer and chief investment officer of South Texas Money Management.