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Finance Accounting Planning For Retirement With IRA's
Finance Accounting Planning For Retirement With IRA's
| Planning For Retirement With IRA's |
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| Written by Doeren Mayhew |
| Friday, 16 October 2009 09:40 |
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Retirement plans benefit from special tax advantages but also are subject to special restrictions. For instance, there are rules that allow tax breaks for contributing to retirement plans and rules that allow retirement plan income to grow on a tax-deferred basis, but there also are rules that limit annual contributions and rules that dictate the timing and amount of distributions you take from those plans. IRAs are very popular because they are so easy to setup and also easy to maintain. A person does not need employer approval to open an IRA and you can contribute as much as you want to the account, as long as you do not exceed the annual limits). Below are the three main types of IRAs. Traditional IRA. With this type of IRA you are able to let your assets grow on a tax-deferred basis. This is advantageous because you will not have to pay taxes on your assets until you withdraw funds from your account. 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). If you are not able to make a deductible contribution (or a Roth contribution), then you may choose to make a nondeductible contribution. Making a nondeductible contribution will still afford you the advantage of tax-deferred growth. Also, if you withdraw funds after you reach age 59 1/2, only earning will be taxed. You are able to withdraw all nondeductible contributions free of tax. Roth IRA. You are able to contribute the same amount to a Roth IRA as you are able to contribute to a traditional IRA. The real difference between the two is their eligibility rules, such as the lack of an age limit with respect to contributions. This disregard for the age limit is only applicable if 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. If you decide to go with a Roth IRA you will have to remember than you are not allowed to claim a deduction. However, you are allowed to withdraw all of your IRA earnings free of tax after you reach the age of 59. You will have to have your account for 5 years to do this. Traditional IRAs also have required minimum distribution rules that must be followed, Roth IRAs do not have such restrictions. If you already have a traditional IRA you may be able to convert a portion, or even all, of your traditional IRA to a Roth IRA. You will have to do a cost-benefit analysis to see if the benefit from the conversion will outweigh the added tax obligations that result from changing the plan. Simplified Employee Pension SEP IRA. A SEP IRA is made for entrepreneurs. It enables them to make larger contributions than would otherwise be allowed by a traditional or Roth IRA. The tax rules for a SEP are the same as the other two types of IRA?s. About the Author: 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. Kindly provided by LJ-Marketing.dk You are welcome to use this article on your own website, if you include the link just before this text. |
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