Individual Retirement Accounts
From LoveToKnow Seniors
Federal legislation created tax deductible Individual Retirement Accounts (IRA) in the 1980’s for U. S. citizens showing an earned income. Since then, legislation continues to endorse changes affecting various aspects of Individual Retirement Accounts, forcing contributors to be aware of current policy, how it affects tax deductions, whether income growth is tax free and if penalties are incurred for early withdrawal.
Changes in Individual Retirement Accounts
By 1986, changes created limits for contributors taking part in employer sponsored retirement plans. Further alterations established in 2002 increased contribution limits. Contributor age related modifications to the law further restricted contribution amounts for participants age 50 and older. Today, contributions to traditional Individual Retirement Accounts may or may not be deductible depending on age, total income and what retirement coverage you have through your place of employment.
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 that set permanent increased contribution limits to IRAs (including Roth IRAs).
SIMPLE IRA
Participating in a SIMPLE IRA through your place of employment offers all the benefits of a traditional IRA. In many situations, employers match contributions within set limits. Employers maintaining retirement accounts must hold funds in the employee’s name in a separate account or annuity. This stipulation must be met in order to qualify to receive voluntary employee contributions and to meet “qualified employer” regulations (a deemed IRA). According to Publication 590 - Introductory Material a qualified employer plan includes one of the following:
- Qualified pension, profit sharing, or stock bonus plan
- Qualified employee annuity plan
- Tax-sheltered annuity plan
- Deferred compensation plan maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.
Withdrawals are taxed as income, including capital gains. To receive a tax deduction for Individual Retirement Account contributions, individuals should use Form 1040. Retirees are taxed at a lower rate. Combine this advantage with tax savings received at the time the contribution is made, and IRAs prove to be a valuable tax management tool.
Roth IRA
In January, 1998, Roth IRAs established opportunities for tax-deferred growth, which means contributors don’t pay taxes on investments until a withdrawal is made. Earnings on nondeductible contributions are tax-free. Roth IRAs allow contributors to put money into an account where the growth escapes federal tax. Therefore, contributions add up after years of tax-free compounding.
Currently, for individuals 50 years of age or older, contributions made to Roth IRAs in 2006 will be the lesser of your taxable compensation for the year or $5,000.
IRA Deadlines
Because Individual Retirement Accounts reduce taxable income, it’s important to note that contributions can be made as late as the first tax return due date. Also, these contributions can be considered retroactive to the previous tax year.
Make an Informed Investment
Specifics for each type of IRA can be complex. Do your research. Find out how much you can contribute, and whether or not you qualify. Don’t be mislead. Learn about penalties—they can be costly and negate earnings. Understand the rate of return on your investment to be sure it fits into your family’s long range-plans. For example, how do IRA’s fit into writing a will? Investigate what steps should be taken upon death. Can the account be closed without penalty? Include details in your will.
Find a certified professional to help you make wise investment choices. If you don't know whom to call, check with your local Senior Center for Senior Citizen Services Information.
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