What
is an IRA?
An IRA (Individual Retirement Account)
is a personal savings plan that gives you tax advantages for
setting aside money for retirement.
What are some tax advantages
of an IRA?
- Contributions you make to an IRA may be fully or partially
deductible on your Federal Income Tax return, depending
on which type of IRA you have and on your fiscal circumstances.
- Generally, amounts in your IRA (including earnings and
gains) are not taxed until distributed. In some cases, amounts
are not taxed at all if distributed according to the rules.
Tax
credit for IRA contributions
If you are an eligible
individual, you may be able to claim a credit for a percentage
of your qualified retirement savings contributions. The tax
credit percentage is based upon your filing status and modified
Adjusted Gross Income (AGI). This credit is in addition to
any deduction or exclusion allowed for your contributions.
How
much can I contribute to an IRA?
The Economic Growth and Tax Relief
Reconciliation Act (EGTRRA) of 2001 allows you to save more
money for retirement. It also creates some great financial
planning opportunities. The new tax law increases the amount
of money you can contribute each year to your Traditional
and Roth IRAs. In addition, if you are age 50 or older, you
can make larger "catch-up" contributions to your IRA.
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The new MAXIMUM contribution limits
for IRAs are as follows:
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|
Year
|
Contribution
|
Catch-up Contribution
(age 50 or older)
|
Maximum Contribution
(age 50 or older)
|
|
2006
|
$4,000
|
$1,000
|
$5,000
|
|
2007
|
$4,000
|
$1,000
|
$5,000
|
|
2008
|
$5,000
|
$1,000
|
$6,000
|
|
2009
|
indexing begins incrementally
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If you have more than one IRA, whether it is a Traditional IRA or a Roth IRA, the limit applies to the total contributions you make to all your IRAs for the year. If you are covered by a retirement plan at work, your deduction for contributions to your IRA will be reduced if your modified Adjusted Gross Income (AGI) is between:
 | $34,000 and $44,000 for a single individual (or head of household), |
| $54,000 and $64,000 for a married couple filing a joint return (or a qualifying widow/widower), or |
| $-0- and $10,000 for a married individual filing a separate return. |
When
can I withdraw money from my IRA?
An IRA is a tax-favored means of
saving for your retirement, therefore, a penalty in the form
of a 10% additional "early distribution" tax generally applies
if you withdraw money from your IRA before you are age 59½.
The 10% "early distribution" tax applies to that part of the
distribution that you have to include in gross income. It
is in ADDITION to any regular income tax
on that amount.
There are several exceptions to the
age 59½ rule. Even if you receive a distribution before you
are age 59½, you may not have to pay the 10% "early distribution"
tax if any of the following exceptions apply:
|
You have unreimbursed
medical expenses that are MORE than 7.5%
of your adjusted gross income
|
|
Your distributions
are NOT more than the cost of your medical
insurance
|
| You are disabled |
| You are the beneficiary of a deceased IRA owner |
| You are receiving distributions in the form of an annuity |
|
Your distributions
are NOT more than your qualified higher
education expenses
|
|
You use your distributions
to buy, build, or rebuild a FIRST home
|
| Your distribution is due to an IRS levy of your qualified plan |
Traditional
IRA
If you are under
age 70½, you may be able to make deductible contributions
to your Traditional IRA. Contributions made to your Traditional
IRA may be deductible on your Federal Income Tax return.
Contributions can be made to your Traditional
IRA for each year that you receive compensation and have not
reached age 70½. For any year in which you do NOT work, contributions
cannot be made to your IRA unless:
| You receive alimony, or |
| You file a joint return with a spouse who has taxable compensation. |
Contributions CANNOT
be made to your Traditional IRA for the year IN WHICH
you reach age 70½ or for any LATER year.
You cannot keep
funds in a Traditional IRA indefinitely. You MUST
start receiving distributions from your Traditional IRA by
April 1st of the year FOLLOWING the year
in which you reach age 70½. If there are no distributions
taken by this time or if the distributions are not large enough,
you may have to pay a 50% excise tax on the amount not distributed
as required.
Generally, distributions
from a Traditional IRA are taxable in the year in which you
receive them. Exceptions to this rule are rollovers and tax-free
withdrawals of contributions, and the return of nondeductible
contributions.
Roth
IRA
Regardless of your age, you may
be able to make nondeductible contributions to your Roth IRA.
You DO NOT have to report Roth IRA contributions
on your Federal Income Tax return.
Unlike a Traditional
IRA, you cannot deduct contributions to a Roth IRA. Contributions
can be made to your Roth IRA AFTER you reach age 70½ and you
can leave amounts in your Roth IRA as long as you live.
You may be eligible to convert amounts
from your Traditional IRA into a Roth IRA if:
|
Your modified AGI
is not more than $100,000, AND
|
| You are not a married individual filing a separate return. |
You must pay taxes on the taxable portion of the Traditional
IRA when it is rolled over into the Roth IRA, but the 10%
early withdrawal penalty will NOT apply.
You DO NOT have to
pay taxes on any qualified distributions from your Roth IRA.
A qualified distribution is any payment or distribution from
your Roth IRA that meets the following requirements:
|
You must have held
the Roth IRA for at least 5 years, AND
|
| The payment or distribution is made on or after the date you reach age 59½. |
Please note: The above referenced information on IRAs is only a brief summary of some of the IRS rules and regulations that apply to them. The National Slovak Society is not liable for any inaccuracies or misrepresentation in the above information. Please consult your tax advisor for any clarifications or questions regarding the above referenced information.
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