An
Individual Retirement Account-Individual Retirement Annuity - IRA-is an
opportunity that enables qualifying individuals to save and invest for
retirement.
IRAs go back to the early 1980s when federal legislation
created the tax deductible IRA for anyone with earned income. Significant
changes in 1986 established income limits for participants in an
employer-sponsored retirement plan and closed the deductible IRA for many
people.
Contribution limits increased as of 2002 and provisions are
in place for further increases in the future. An increased limit was added for
individuals age 50 and above.
There are several types of IRAs: Traditional IRAs, Roth IRAs,
SIMPLE IRAs and SEP IRAs.
IRAs - traditional
IRA and Roth IRA - are special classifications for tax purposes. The actual investment
can be stocks, bonds, certificates of deposit, or mutual funds.
Arrangements
are made with any stockbroker or bank. Fees vary. Before opening an IRA, read
the information about each product you are considering. For a mutual fund ask
for a prospectus.
With
the complexity of the IRAs and the options, few people are prepared to make all
the decisions without good advice from a qualified financial advisor and/or tax
preparer aware of your personal goals and risk tolerances. An IRA is only one
piece in your total financial plan.
Type
of Income:
Only earned income compensation, such as salary and wages, as
defined in IRS Publication 590 may be invested in either the traditional, or
Roth IRA. (For example, pension, and investment income do not quality.)
- Traditional
IRAs allow you to save money without paying taxes until you withdraw it.
The money you put into the IRA can lower your taxable income and grows
tax-free while it's in the IRA account.
- Roth IRAs
offer a slight twist on the traditional IRA. There are differences in the
tax advantages and who can open a Roth IRA. The most attractive part of
Roth IRAs is that your money is withdrawn without paying federal taxes.
Roth is not a financial term. The Roth IRA is named after
the sponsor of the original legislation, Sen. William V.Roth, Jr. (R-Del)
Traditional IRAs
The first type of IRA created was the Traditional IRA.
Annual contributions to a Traditional IRA may be tax deductible depending on
the individuals Modified Adjusted Gross Income (MAGI) and whether or not the
individual and his/her spouse are covered by an employer's retirement plan.
Furthermore, earnings accumulate on both principal and interest paid and is tax
deferred up to the point the individual makes a withdrawal from the IRA.
Roth IRAs
Roth IRAs were created by the Taxpayer
Relief Act of 1997 to offer individuals an alternative retirement vehicle with
different tax benefits from its counterpart. Depending on an individual's
Adjusted Gross Income, contributions can be made (even past age 70 1/2) to a Roth
IRA but are considered non-deductible.
However, earnings may be withdrawn tax-free and even
penalty-free when certain conditions are met. Contributions to a Traditional IRA
may be converted to a Roth IRA if the individual's AGI is less than $100,000.
Simplified Employee Pension (SEP-IRA)
The SEP-IRA was created to provide employers with a
simplified way to make contributions to their employees' retirement income. SEP
rules permit employers to make an annual contribution of up to 25% of the
employee's compensation or $42,000, whichever is less.
In addition, the employee may contribute the smaller of
$4,000 or 100% of their compensation to an IRA. Iif the individual will be 50
by 12-31, he/she may also make an additional catch-up contribution of $500.
However, the amount may or may not be deductible if the participant is covered
by an employer retirement plan.
Savings Incentive Match Plan for Employees (SIMPLE IRA)
The SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs
for each eligible employee. It was created for businesses having fewer than 100
employees as a simplified and cost effective way for employers and employees to
make contributions to provide retirement income.
The employee may defer a portion of his/her income to the SIMPLE
IRA. The employer has options of a matching contribution. There are specific
deadlines and requirements for employers to adopt a SIMPLE IRA plan.
The Individual Retirement Account or IRA, is the original
idea conceived to help the individual that had no retirement plan through work
save for their retirement, tax free.
The traditional IRA option allowed tax
payers to invest in an IRA and deduct it from their adjusted gross income at
the end of the year, thus saving them money on their tax liability.
In other
words, the savings was really a pre-tax deduction. Today, there are more
versions available, and some have restrictions on the tax deduction you're
allowed to take. Nonetheless, the savings benefit is still present.
As with any other type of investing, any individual that is
interested in investing in an IRA, MSA,
401(k), or any other form of retirement planning, should seek the advice of a
trained professional.
There is a limit on the amount of money an individual is
allowed to invest in their individual retirement account - presently that limit
is set at $4000. However, there is no limit to the amount of individual retirement
accounts a person may have.
Although a person may have any number of such accounts; the
limit they are allowed to invest means that they can only invest that limit on
all accounts combined.
Therefore, even if someone has as many as 30 individual
retirement accounts, they can only invest $4000 in total in these accounts and
so an individual retirement account is best if your income falls below certain
thresholds.
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