What is an Individual Retirement Annuity (IRA)?
A Traditional IRA is a personal retirement plan to which eligible participants can make tax deductible and non-deductible contributions each year.
Am I Eligible to Set Up an IRA?
If you are under the age of 70 1/2 at the close of the tax year and have earned income during the tax year an IRA may be established.
How do you contribute to a Traditional IRA?
You are able to contribute to your Traditional IRA if you (or your spouse) earn a taxable income and are under the age of 70 1/2. To determine if your contributions are tax deductible depends on your income level and if you have a work – related retirement account.
Here are the guidelines for 2019:
- If you do have a 401(k) or other retirement plan at work, your contribution is fully deductible only if your adjusted gross income is less than $103,000 for a married couple filing jointly or less than $64,000 for an individual
- If you have a workplace retirement plan, the deduction for your traditional IRA is phased out completely if your AGI is $123,000 or more (married couple filing jointly) or $74,000 or more (individual, or $10,000 for a married person filing separately
- If you’re not covered by a workplace plan but your spouse is, your contribution is fully deductible if your combined income is less than $193,000 and gets phased out at $203,000 or more
When can I take money out of my IRA?
You are able to take money out of your IRA at any point in time, however, you will pay regular income taxes on the full amount when you withdraw. At the time of withdrawal, if you are under the age of 59 1/2, you will be charged a 10% penalty in addition to paying the regular income taxes.
When do I have to start withdrawing?
You can begin making qualified withdrawals from a traditional IRA starting at age 59 1/2, however, at age 70 1/2 you must start making withdrawals that are known as required minimum distributions. The required minimum distribution is based on how much you have saved in the account and your life expectancy.
Am I Eligible to Set Up an IRA?
Provided that you are under the age of 70 1/2 at the close of the tax year and have earned income during the tax year in question, an IRA may be established. Most IRA owners invest in an IRA in order to make a deductible contribution, rather than a non-deductible contribution. In order to qualify for a deductible contribution, an additional question must be answered. Have you or your spouse been an active participant in an employer-sponsored plan in any part of the plan year? A good rule of thumb for determining the answer to this question is to look at your W-2, since your employer is required to report your active status with regard to such plans. If it is determined that you are an active participant in an employer-sponsored plan, the deduction for the contributions made to the IRA may be reduced or eliminated. For 2010, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified Adjusted Gross Income (AGI) for your applicable tax filing status is with the ranges of the following chart:As an example, assume that a client is a single individual and is currently an active participant in an Employee-Sponsored Plan. If this individual’s income in 2010 is under $56,000, the IRA contribution is fully deductible since this income falls under the phase-out range. If the client’s income is $60,000, a portion of the contribution will be deductible. However, if the contributing individual’s income is over $66,000, the contribution is entirely non-deductible. Note that if you file a joint return and you are not a participant in an Employee-Sponsored Plan, but your spouse is an active participant, the deduction for the contribution may be reduced or eliminated. The phase out range for 2009 is $166,000-$176,000. (See IRS Pub 590 for more details.)
If you and your spouse are not active participants in an employer-sponsored plan, the deductible amount may be the lesser of 100% of income or the maximum contribution allowed.
How Much Can I Contribute to an IRA?
If you and your spouse are not active participants in an employee-sponsored plan, you may contribute the lesser of 100% of income or the maximum contribution allowed in the corresponding tax year. See the chart below for the maximum contribution allowed during the tax year:
Additionally, if you are age 50 or older for the tax year of the contribution, an additional catch-up amount can be contributed. This catch-up option allows an additional $1,000 to be contributed during the tax year.If you are married, you may also have the opportunity to make a deductible contribution into an IRA on behalf of your non-working spouse provided that a joint return is filed for the year. Please consult your tax advisor to determine your specific eligibility and deductibility amounts.
What are the Restrictions on an IRA Distribution?
You may withdraw IRA funds at any time and income taxes are payable on the entire pre-tax portion (all of the money will be pre-tax provided that there are no non-deductible IRA contributions). A 10% penalty tax may also be imposed if you are under age 591/2. Exceptions to this penalty tax (if under 591/2) are available. One such exception applies to those situations in which the funds are used by a first time homebuyer (subject to a $10,000 limitation). A second exception applies where an IRA distribution is used for qualified educational expenses. However, these two exceptions do not apply to the ordinary income tax assessed upon the pre-tax portion of the withdrawal. Please consult your tax advisor to determine whether these or other exceptions apply to your specific situation.
Additionally, you must begin taking Required Minimum Distributions (RMDs) at age 70 1/2, which are based on your life expectancy. The required beginning date for an RMD is April 1 of the calendar year following the calendar year in which you attain age 70 1/2.
Can You Transfer/Rollover Existing Retirement Accounts to an IRA?
Yes, in addition to accepting contributory funds, an IRA also accepts transfers from existing IRAs, SEP IRAs, and SIMPLE IRAs (after the SIMPLE IRA has been in place for two years) as well as rollovers from 401(k), TSA, Governmental 457, Profit Sharing and other retirement plans. Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it’s important that you understand your options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees and any potential penalties.