The IRS Tells Us To Know the Rules Before Breaking Open Our Retirement Piggy Bank
[Stacie says: the IRS explains below some rules about penalties and withdrawals from your retirement account.]
If you are under age 59 ½ and plan to withdraw money from your retirement account, you will likely pay both income tax and a 10% early distribution tax on any previously untaxed money that you take out. Withdrawals from a SIMPLE IRA before you are age 59 ½ and during the “2-year period” may be subject to a 25% additional early distribution tax instead of 10%. The 2-year period is measured from the first day that contributions are deposited. So, consider the decrease in your retirement savings and the increase in tax before you withdraw from either your IRA or a retirement plan (for example, 401(k) or 403(b) plans).
There are some different exceptions to the 10% early distribution tax depending on whether you take money from an IRA or a retirement plan.
Exceptions for IRAs Include:
You use the amount withdrawn to pay:
medical insurance premiums while unemployed;
qualified higher education expenses; or
to buy, build or rebuild a first home.
An exception also applies if you receive distributions in the form of an annuity.
See Publication 590, Individual Retirement Arrangements (IRAs), for a complete list and details of the exceptions.
Exceptions for Retirement Plans Include:
you separate from service and are age 55 or older in that year; or
you elect to receive the money in substantially equal periodic payments after separation from service.
See Publication 575, Pension and Annuity Income, for a complete list and details of the exceptions. If you are required to pay the 10% early distribution tax, you may need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, along with your tax return.
Keeping The Correct Records To Support Your Deductions
[Stacie says: keeping the right records to support your business income and deductions can save you some sleepless nights if you are selected for audit. The IRS offers some helpful tips in their Small Business News.]
You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should also include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books.
Supporting Business Documents
Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. For more detailed information refer to Publication 583, Starting a Business and Keeping Records.
The following are some of the types of records you should keep:
Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:
Cash register tapes
Bank deposit slips
Receipt books
Invoices
Credit card charge slips
Forms 1099-MISC
Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases.
Documents for purchases include the following:
Canceled checks
Cash register tape receipts
Credit card sales slips
Invoices
Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following:
Canceled checks
Cash register tapes
Account statements
Credit card sales slips
Invoices
Petty cash slips for small cash payments
Travel, Transportation, Entertainment, and Gift Expenses
If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.
For additional information on how to prove certain business expenses, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets include the following:
When and how you acquired the assets.
Purchase price
Cost of any improvements.
Section 179 deduction taken.
Deductions taken for depreciation.
Deductions taken for casualty losses, such as losses resulting from fires or storms.
How you used the asset.When and how you disposed of the asset.
Selling price.
Expenses of sale.
The following documents may show this information.
Purchase and sales invoices.
Real estate closing statements.
Canceled checks.
Employment taxesThere are specific employment tax records you must keep. Keep all records of employment for at least four years. For additional information, refer to Recordkeeping for Employers and Publication 15, Circular E Employers Tax Guide.
