IRAs (I-R-As), which stand for Individual Retirement Accounts, allow you as a taxpayer to set aside money for retirement with several tax advantages. For example, you usually aren't responsible for paying taxes on the money you earn on an IRA until it's distributed. You can even avoid taxes altogether if you distribute your IRA according to the rules. Another tax advantage of IRAs is that the amount you contribute is often tax deductible. However, the tax benefits of IRAs can be forfeited to taxes and penalties if you don't follow the rules. For instance, you could be liable to pay additional taxes if you make too many contributions, withdraw early, fail to withdraw when required, or invest in collectibles. You could be penalized for not filing a required 8606 (eighty-six oh six) form or for not accurately reporting nondeductible contributions. Taxes and penalties may also be imposed upon certain practices prohibited by the Internal Revenue Service, or IRS (I-R-S). These actions include borrowing money from your IRA, buying property for your personal use with IRA money, receiving unreasonable compensation for managing your IRA, selling property to it, and using your IRA as collateral for a loan. Not only are you not allowed to engage in these activities, but neither are your beneficiary nor members of your family. Failure to follow the rules for IRAs can result in additional costs, but these can usually be avoided by conforming to the established guidelines for Individual Retirement Accounts. To get the most from your IRA, know the rules and regulations. If you're uncertain, talk to a tax professional.
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