Tax Cheat Sheet Part III - IRAs and Other Deductions

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| Author       | Source       | 
| :-------------: |:-------------:|
|  [u/areallygoodsandwhich](https://www.reddit.com/user/areallygoodsandwhich/) | [Reddit](https://www.reddit.com/r/Superstonk/comments/nnyc9d/tax_cheat_sheet_part_iii_iras_and_other_deductions/) | 

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[Education 👨‍🏫 | Data 🔢](https://www.reddit.com/r/Superstonk/search?q=flair_name%3A%22Education%20%F0%9F%91%A8%E2%80%8D%F0%9F%8F%AB%20%7C%20Data%20%F0%9F%94%A2%22&restrict_sr=1)

Howdy Everyone!

And welcome to all new AMC Apes! For new Apes, I'm an active CPA with a few years of experience in tax. I love giving back and want to spread some tax knowledge in anticipation of MOASS. Don't worry, I have plenty of Explain Like I'm Ape (ELIA) examples throughout!

[Part I - Income](https://www.reddit.com/r/Superstonk/comments/niz85x/tax_cheat_sheet_part_i_income/)

[Part II - Deductions](https://www.reddit.com/r/Superstonk/comments/nk9bv8/tax_cheat_sheet_part_ii_deductions/)

These posts build off each other. I highly recommend reading over my earlier posts before moving forward!

Few Things First:

-   Tax is super vast. I won't know every single thing.

-   Please don't ask me to prepare your return. I don't want to use this new platform as some side hustle. It will be worth every dollar to give this to a CPA firm.

-   The Biden Administration is considering making some changes. I have no idea if/when they will go into effect, nor do I know every single thing they're considering. But I will make a note of these proposals as we go along.

-   Keep in mind that this is for Federal (Big Government) purposes. The state and cities you live in will have similar forms, but the rules and tax rates will be different.

-   Foreign apes, I see your comments! I just ask you to be a little patient! Let me get through the rest of the fundamentals and I will get a post for you guys! I honestly know nothing about this area (just yet)!

-   If you find any interesting articles/videos/topics about highly specific things, feel free to comment/DM them and I will try my best to explain.

[![r/Superstonk - Tax Cheat Sheet Part III - IRAs and Other Deductions](https://preview.redd.it/gwu9c42dy4271.jpg?width=554&format=pjpg&auto=webp&s=9c82c6f74cb676920f01b2edd36cd7f98314774d)](https://preview.redd.it/gwu9c42dy4271.jpg?width=554&format=pjpg&auto=webp&s=9c82c6f74cb676920f01b2edd36cd7f98314774d)

Story of My Life

Fun Fact #3: If you live in New Mexico and are over the age of 100, you are exempt from paying state taxes! WOW!

Definitions

-   Individual Retirement Account (IRA) - an account that you can set up to save and invest for retirement

-   401(k) - Really similar to an IRA. For now just treat this like a Traditional IRA

-   SEP IRA - IRAs for small businesses and self-employed individuals

-   SIMPLE IRA - IRAs for small businesses and self-employed individuals

My last post covered below the line deductions, and changes to charitable contributions for 2021. I wanted to break up deductions into two parts to prevent some information overload.

Grab your crayons. Let's get sexy.

Above the Line Deductions

[![r/Superstonk - Tax Cheat Sheet Part III - IRAs and Other Deductions](https://preview.redd.it/49anrl5my4271.png?width=362&format=png&auto=webp&s=373c7598c483a20f893bc6befd28b2595ee8b501)](https://preview.redd.it/49anrl5my4271.png?width=362&format=png&auto=webp&s=373c7598c483a20f893bc6befd28b2595ee8b501)

Not Today IRS

Let's look back at the tax formula from last time. These "above the line deductions" are taken BEFORE your below the line deductions. These can be taken IN ADDITION TO ITEMIZED DEDUCTIONS. Some of these may apply to you and some won't.

Here's what I think are the most relevant:

-   Contributions to a Retirement Plan

-   Health Savings Account (HSA) and Medical Savings Account (MSA) Contributions

-   Student Loan Interest

-   Tuition and Fees

What's an IRA?

This is by far the most impactful. I've gotten several questions on IRAs, so I hope this will cover all of your questions.

An Individual Retirement Account (IRA) is an account that you can set up to save and invest for retirement. A lot of you Apes probably have these set-up with your employer. There's plenty of different types, with each having their own rules. *The most common and popular are* *Traditional IRAs* *and* *Roth IRAs.*

What's the difference between a Traditional IRA and a Roth IRA?

The simple answer is when are you paying tax.

Contributions (putting money in) to a traditional IRA are done pre-tax and are an above the line deduction on your tax return. You are only taxed when you withdrawal your money from this account.

ELIA: Traditional IRA = PAY TAX LATER. Bananas are not taxed. Bananas added will lower the tax you pay this year.

Contributions to a Roth IRA are done post-tax, meaning the money you're adding has already been taxed. You don't get any deducting by contributing to a Roth IRA. But, when you withdraw money from your Roth IRA, it is tax-free (you already paid it!)

ELIA: Roth IRA = PAY TAX NOW. Bananas have already been taxed. No tax later.

Phase-outs to Contributions

You might remember seeing this definition listed before. If your income (AGI) is too high, phase-outs will reduce or prevent you from taking a deduction.

If MOASS, anyone with a traditional IRA will not be able to get a deduction for contributions made to their IRA. Roth IRA hodlers are unaffected, since they don't get a deduction by contributing money.

What Happens if I Contribute More Than What's Allowed?

For Traditional IRAs, the maximum contribution for most of you is $6,000 a year ($7,000 if you're older than 50). If you've contributed more than this in a year, you will be given a 6% penalty each year for the excess amounts.

Excess Roth Contributions depend on your MAGI (AGI but a little different). If MOASS, your allowable contribution is 0 for 2021 (AGI More than $208K for married Apes and $144K for single Apes)!!! If you've contributed more than this in a year, you will be given a 6% penalty each year for the excess amounts.

To prevent this, you just need to withdraw this excess amount before December 31st. However, this might also cause you to pay a tax penalty (see Early Withdrawal Penalties).

ELIA: Make more money = pay more tax. Too many bananas put in IRA = pay more tax.

Am I Taxed if I sell GME in My IRA?

NOPE! NADA! 0! Not today Uncle Sam!

Stock sales and dividends received in your IRA are tax-free. You will only be taxed when you pull money (distribute) out of the account.

What Happens When I Take My Gains Out?

The IRS boogeyman gets ya! Well Maybe. It depends.

Traditional IRAs and 401(k)s: - These will be taxed as ordinary income and not capital gains.

Roth IRA - If you meet all requirements, your distribution will be tax-free!

Failure to meet all IRA requirements, for Roth and Traditional IRAs, will result in an additional tax.

ELIA: HODL in IRA = no tax. Taking tendies out will probably cause taxes.

These will show up on Line 4 of page 1 on your 1040 return. Notice how there is a box for total distributions and another one for distributions subject to tax!

Early Withdrawal Penalties:

If you pull out money from your IRA before you turn 59.5, you will be subject to a 10% tax. This applies for both Traditional and Roth IRAs.

Additional Roth Rules: If you've owned a Roth IRA for less than five years, you will be taxed a 10% penalty on any distribution...even if you're older than 59.5!

This tax will show up on Schedule 2 - Additional Taxes. For traditional IRAs, this is in addition to the income tax you will pay on distributions too.

Exceptions - Read Me

Here are a few exceptions to avoid this penalty (won't be taxed if pulling out money for the following reasons):

Money is being used to pay for qualified higher education expenses

Ever wanted to go to college, but couldn't afford it? Well I got news for you. You can use your IRA tendies to pay for tuition, fees, books, supplies, equipment, and room & board if enrolled at least part time. This applies to you and your spouse, children, and grandchildren.

Money used to pay for your first house

First-time home buyers can pull a maximum of $10,000 from their IRA tax-free for qualified acquisition costs. Keep in mind this is a one-time offer and is capped at $10k. There are also rules regarding timing, so make sure to do this right at the end.

*You are the Beneficiary of a deceased IRA owner*

Pay close attention to this one. Apes with kids, if you were to pass away BEFORE TURNING 59.5, your spouse/children (if beneficiaries), would be able to distribute money from your IRA and avoid a 10% penalty. If the beneficiary elects to make that IRA their own, they would be hit with the 10% tax if they distribute before turning 59.5.

[![r/Superstonk - Tax Cheat Sheet Part III - IRAs and Other Deductions](https://preview.redd.it/a5217jkt15271.jpg?width=960&format=pjpg&auto=webp&s=feab3b259721201d7911f139f2c61ad55c218c41)](https://preview.redd.it/a5217jkt15271.jpg?width=960&format=pjpg&auto=webp&s=feab3b259721201d7911f139f2c61ad55c218c41)

Money Grows on Trees

Can I Change my IRA?

Yes!

The most common way looks to be you'd receive a distribution from your current IRA for the amount you want to convert. You then have 60 days to rolls this over into another type of IRA. After 60 days this distribution will be hit with the 10% penalty (seeing a pattern??).

Traditional to Roth

This creates taxable income. The amount you convert to a Roth will be taxes as ordinary income (just like traditional IRA distributions mentioned earlier). Refer back to Post I on income taxes if you're confused. This is not the same as a 10% penalty.

Remember when I said your Traditional contributions were deductible? It's because you haven't paid tax on them! So if you convert to a Roth, all of these contributions you've made, as well as any gains you've made from selling STONKS, are taxed.

You can pay this tax with funds being converted in the IRA, but they will be hit with the 10% penalty as well, so best to avoid this and pay normally (same way you'd pay if you had tax due).

Roth to Traditional

I couldn't find a source for this, but I'm pretty sure you can convert (I personally did this last year). This shouldn't create any new tax since your Roth contributions were already taxed!

Other Above the Line Deductions

So that covers IRA. See why we needed a whole post for this? There are also a few I wanted to list that may be relevant to you.

Health Savings Account (HSA) and Medical Savings Account (MSA) Contributions

Do you have an HSA or MSA for your job? If so, any contributions made to these plans will be fully deductible!

Student Loan Interest Payments

Do you have college loans? Do you pay interest on them every month? All interest payments on these loans can be deducted! Unfortunately, all of these will be phased-out if MOASS. But something to keep in mind moving forward!

Tuition and Fees

I mentioned the rules for tuition and fees if you're pulling money from your IRA as payment. However, if you choose to pay with your own money, not from an IRA, these can be deducted here!

Tl;dr: This is why you're going to pay a CPA firm $20,000+ to do this for you and it is worth every penny (Welcome to being High-Net Worth). I will make a post to explain why in the future. :)

Closing Notes:

-   We're going to get to Gifts/Estates/Trusts! A lot of this information builds off each other, so I think getting through some basic loss/deduction rules will be helpful before we branch off into other tax entitles

-   I've gotten a lot of interesting *and specific* questions on State Taxes. For right now, the answer is I don't know! The rules are all different and can change at any time! This is why most accounting firms have an entire team dedicated to JUST State & Local Taxes.

-   I will put together a step-by-step easy guide on how to find out all of your state questions online (it's not as advanced as you think. This is what we do in public accounting)

-   Foreign apes, I see your comments! I just ask you to be a little patient! Let me get through the rest of the fundamentals and I will get a post for you guys! I honestly know nothing about this area (just yet)!

-   If you find any interesting articles/videos/topics about highly specific things, feel free to comment/DM them and I will try my best to explain.

-   I've been slammed with COVID-related tax season for the past 5 months, which is why it took so long for me to post these! I hope to use this downtime, before everything returns to normal, to ease some fear about taxes

-   I'm able to get fundamentals out quickly because they're mostly review from college courses and CPA exams. Once we get into more complex things, it will probably take me longer to absorb and write up!

-   Don't get too comfy. If MOASS this summer, I would expect most state to add or increase their tax rates as a result. No idea if/when they would be pass

Thank you so much for reading :)

Topics I will cover in the future:

-   Finding a CPA firm / What to expect / How not to piss off your accountant

-   Gift Tax, Trusts and Estates

-   Foreign Apes / Non-US Residents

-   Estimated Tax Payments/ How do Understand Your State's Tax Rules

-   Non for Profits / private foundations / etc.

-   Rich People Things

-   Tax Entity Structures

-   How to Do Your Own Tax Research

Sources

<https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits>

<https://www.irs.gov/publications/p590a>

<https://www.investopedia.com/terms/1/401kplan.asp>

<https://www.merrilledge.com/ask/retirement/excess-roth-traditional-ira-contributions>

<https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits>

<https://www.investopedia.com/terms/i/ira.asp>

<https://money.cnn.com/retirement/guide/IRA_Roth.moneymag/index.htm?iid=EL>

<https://www.schwab.com/ira/roth-ira/withdrawal-rules>

<https://www.fidelity.com/tax-information/tax-topics/roth-conversion#:~:text=The%20amount%20you%20choose%20to%20convert%20will%20be%20taxed%20as%20ordinary%20income.&text=Deductible%20contributions%20and%20any%20gains,tax%20on%20the%20full%20amount>.

<https://www.irs.gov/publications/p590b#en_US_2020_publink1000230896>

<https://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement>

<https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits>

<https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021>

<https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits>
