Individual Retirement Account – IRA
- Posted on: Jan 19 2018
Generally, retirement money cannot be withdrawn until the individual reaches the age of 59½ or the individual elects to receive equal periodic distributions over his life expectancy. A taxpayer is required to start withdrawals by the age of 70½. Benefits are not taxable until the taxpayer receives the distribution.
An individual retirement account is an investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs as of 2017: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.
Traditional IRAs
In most cases, contributions to traditional IRAs are tax deductible. For example, if someone contributes $5,500 to his IRA, he can claim that amount as a deduction on his income tax return, and the Internal Revenue Service does not apply income tax to those earnings. However, when the individual withdraws from the account during retirement, his withdrawals are taxed as income. As of 2017, annul individual contributions to traditional IRAs cannot exceed more than $5,500, and additional $1,000 for age 50 or over. Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.
For 2017, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:
• More than $99,000 but less than $119,000 for a married couple filing a joint return or a qualifying widow(er),
• More than $62,000 but less than $72,000 for a single individual or head of household, or
• Less than $10,000 for a married individual filing a separate return.
If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $186,000 but less than $196,000. If your modified AGI is $196,000 or more, you cannot take a deduction for contributions to a traditional IRA.
Roth IRAs
Roth IRA contributions are not tax-deductible. However, eligible distributions are tax-free. This means, you contribute to a Roth IRA with after-tax dollars, but as the account grows, you do not face any taxes on capital gains, and when you retire, you can withdraw from the account without incurring any income taxes on your withdrawals.
For 2017, your Roth IRA contribution limit is reduced (phased out) in the following situations.
• Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $186,000. You cannot make a Roth IRA contribution if your modified AGI is $196,000 or more.
• Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2017 and your modified AGI is at least $118,000. You cannot make a Roth IRA contribution if your modified AGI is $133,000 or more.
• Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.
You have to have taxable compensation to contribute either Traditional IRA or Roth IRA. The deadline to make contribution is April 17, 2018.
Simplified Employee Pension IRAs – SEP IRA
Self-employed individuals, such as independent contractors, freelancers and small business owners, can set up SEP IRAs. If a business owner sets up a SEP IRA for his employees, he can deduct the contributions from his reported business income and potentially secure a lower tax rate on his business income. However, his employees are not allowed to contribute to their accounts, and when they make withdraws from their accounts during retirement; the withdrawals are taxed as income.
SIMPLE IRAs
SIMPLE IRAs or Savings Inventive Match Plans for Employees are also for small businesses and self-employed individuals. However, unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions to their accounts, and the employer is required to make contributions. All the contributions are tax deductible, potentially pushing the business or employee into a lower tax bracket, a helpful way to reduce one’s tax bill.
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