IRA's And Retirement Planning
While retirement plans benefit from special tax advantages, they are also restricted by special tax regulations. For example, you are allowed a tax break if you contribute to a retirement plan and you are able to have your retirement income grow free of taxes (for a certain period of time). However, annual contributions, the total size of each contribution, and the frequency of contributions are subject to restrictions. It is important that you carefully consider your options before deciding on a retirement plan. There are generally two categories to choose from, IRAs and employer-sponsored plans.
Before you can start planning, review the retirement plans that are currently available to you. Generally, there are two categories into which all plans can be sorted: IRAs and employer-sponsored plans. IRAs are perhaps the most widely used retirement plans because they're easy to set up and maintain. You can open up one yourself it doesn't have to be sponsored by your employer and you can contribute as much (or as little) as you want, whenever you want, provided you don't exceed applicable annual limits. Following are descriptions of the three main types of IRAs:
The Traditional IRA: Your IRA assets grow on a tax-deferred basis, meaning that you pay no tax until the day that you withdraw your funds.
Your eligibility to make a contribution depends on statutory limits, your earned income and your age. Your contribution is limited to the amount of earned income income from wages and self-employment income that you have for the year. It doesn't include investment income. Those age 50 and older may be able to make additional catch-up contributions. Plus, your spouse may use your earned income to make a contribution of his or her own. However, you (and your spouse) are eligible to make contributions only if you're under age 701/2 at the end of the year for which you're making the contribution.
Before contributing to a traditional IRA, be sure you wouldn't be better served by contributing to another IRA type, such as a Roth IRA, or to an employer's 401(k) plan.
One factor that may affect your decision is the deductibility of your contribution. Your income level and other factors will determine if your contribution to a traditional IRA will be fully deductible. If neither you nor your spouse is eligible to participate in an employer-sponsored plan, your contribution is deductible no matter how much income you earn. But if you or your spouse is eligible, your tax deduction for making an IRA contribution may be reduced or completely eliminated depending on your adjusted gross income (AGI).
For those that are not able to make a deduction contribution, making a nondeductible contribution is a viable option. You will still be able to enjoy tax-deferred growth on your retirement account. Additionally, if you wait until you are age 59 you can withdraw your funds and only be taxed on earnings.
Roth IRA. You may contribute the same amount to a Roth IRA as you can to a traditional IRA, but there are different eligibility rules, such as no age limit with respect to contributions, so long as you meet the earned income requirement.
You also must remember that the total annual contributions to your IRA may never exceed the defined limit. In order to get around these limits you are able to split your contribution between a traditional and Roth IRA.
The Roth IRA also differs from a traditional IRA in that you won't be able to claim a deduction for your contributions. But all Roth IRA earnings can be withdrawn tax free after age 591/2, provided you've had the account for at least five years. (You can withdraw amounts up to your total contributions tax free at any time.)
Traditional IRAs also have required minimum distribution rules that must be followed, Roth IRAs do not have such restrictions.
If a Roth IRA sounds like a better place to park your retirement funds but you already have a traditional IRA, you may be able to elect to convert some or all of it to a Roth IRA. In so doing, you'll be creating taxable income, but you'll also be getting the benefit of future tax-free withdrawals.
Simplified Employee Pension (SEP) IRA. A SEP IRA provides self-employed individuals a way to make more significant retirement contributions than would be available to them through a traditional or Roth IRA. Funds are treated, for tax purposes, the same as IRA funds; you may claim a deduction for your contributions, and distributions will be taxed. But the contribution limits can be much higher. - 23200
Before you can start planning, review the retirement plans that are currently available to you. Generally, there are two categories into which all plans can be sorted: IRAs and employer-sponsored plans. IRAs are perhaps the most widely used retirement plans because they're easy to set up and maintain. You can open up one yourself it doesn't have to be sponsored by your employer and you can contribute as much (or as little) as you want, whenever you want, provided you don't exceed applicable annual limits. Following are descriptions of the three main types of IRAs:
The Traditional IRA: Your IRA assets grow on a tax-deferred basis, meaning that you pay no tax until the day that you withdraw your funds.
Your eligibility to make a contribution depends on statutory limits, your earned income and your age. Your contribution is limited to the amount of earned income income from wages and self-employment income that you have for the year. It doesn't include investment income. Those age 50 and older may be able to make additional catch-up contributions. Plus, your spouse may use your earned income to make a contribution of his or her own. However, you (and your spouse) are eligible to make contributions only if you're under age 701/2 at the end of the year for which you're making the contribution.
Before contributing to a traditional IRA, be sure you wouldn't be better served by contributing to another IRA type, such as a Roth IRA, or to an employer's 401(k) plan.
One factor that may affect your decision is the deductibility of your contribution. Your income level and other factors will determine if your contribution to a traditional IRA will be fully deductible. If neither you nor your spouse is eligible to participate in an employer-sponsored plan, your contribution is deductible no matter how much income you earn. But if you or your spouse is eligible, your tax deduction for making an IRA contribution may be reduced or completely eliminated depending on your adjusted gross income (AGI).
For those that are not able to make a deduction contribution, making a nondeductible contribution is a viable option. You will still be able to enjoy tax-deferred growth on your retirement account. Additionally, if you wait until you are age 59 you can withdraw your funds and only be taxed on earnings.
Roth IRA. You may contribute the same amount to a Roth IRA as you can to a traditional IRA, but there are different eligibility rules, such as no age limit with respect to contributions, so long as you meet the earned income requirement.
You also must remember that the total annual contributions to your IRA may never exceed the defined limit. In order to get around these limits you are able to split your contribution between a traditional and Roth IRA.
The Roth IRA also differs from a traditional IRA in that you won't be able to claim a deduction for your contributions. But all Roth IRA earnings can be withdrawn tax free after age 591/2, provided you've had the account for at least five years. (You can withdraw amounts up to your total contributions tax free at any time.)
Traditional IRAs also have required minimum distribution rules that must be followed, Roth IRAs do not have such restrictions.
If a Roth IRA sounds like a better place to park your retirement funds but you already have a traditional IRA, you may be able to elect to convert some or all of it to a Roth IRA. In so doing, you'll be creating taxable income, but you'll also be getting the benefit of future tax-free withdrawals.
Simplified Employee Pension (SEP) IRA. A SEP IRA provides self-employed individuals a way to make more significant retirement contributions than would be available to them through a traditional or Roth IRA. Funds are treated, for tax purposes, the same as IRA funds; you may claim a deduction for your contributions, and distributions will be taxed. But the contribution limits can be much higher. - 23200
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This data is distributed for informational purposes only; Doeren Mayhew is not rendering legal, accounting, or other professional advice or opinions and assumes no legal responsibility. Contact Doeren Mayhew for more information.
posted by X - Men @ 3:57 AM
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