Retirement plans have special tax advantages, but they also suffer from tax regulations. Two benefits would be that you are able to get a tax break if you contribute to a retirement plan and you are also able to have your retirement income grow tax free. The regulations include things such as limits on annual contributions, frequency of contributions, and the total size of each contributions. Before jumping into a specific IRA plan it is wise to weigh your options in order to find the plan that is right for you. There are two basic categories to choose from; you can either go with an IRA or an employer-sponsored plan.
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.
Contribution deductibility is one factor that often times leads an indication to switch the type of IRA that they use. Your income level is an important indicator as to whether you will be able to deduct all of your contributions. If you and your spouse are able to participate in an employer-sponsored plan, then you will definitely be able to deduct your contributions. However, these deductions might not be worth anything if your adjusted gross income (AGI) is too high.
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.
It is important to keep in mind that you are not able to claim a deduction for your contributions with a Roth IRA. However, you are able to withdraw all IRA earnings without tax after you reach age 59. This only applies if you have had the account for at least 5 years.
If you already have a traditional IRA, then you may be interested in converting a portion, or the entire IRA, to a Roth IRA. You will need to see if this change will benefit you even after considering the additional tax implications.
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. - 31821
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.
Contribution deductibility is one factor that often times leads an indication to switch the type of IRA that they use. Your income level is an important indicator as to whether you will be able to deduct all of your contributions. If you and your spouse are able to participate in an employer-sponsored plan, then you will definitely be able to deduct your contributions. However, these deductions might not be worth anything if your adjusted gross income (AGI) is too high.
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.
It is important to keep in mind that you are not able to claim a deduction for your contributions with a Roth IRA. However, you are able to withdraw all IRA earnings without tax after you reach age 59. This only applies if you have had the account for at least 5 years.
If you already have a traditional IRA, then you may be interested in converting a portion, or the entire IRA, to a Roth IRA. You will need to see if this change will benefit you even after considering the additional tax implications.
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. - 31821
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