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.
Before you can start planning, review the retirement plans that are currently available to you. Generally, there are two categories into which all plans can be sorted: IRAs and employer-sponsored plans. IRAs are perhaps the most widely used retirement plans because they're easy to set up and maintain. You can open up one yourself it doesn't have to be sponsored by your employer and you can contribute as much (or as little) as you want, whenever you want, provided you don't exceed applicable annual limits. Following are descriptions of the three main types of IRAs:
The Traditional IRA: Your IRA assets grow on a tax-deferred basis, meaning that you pay no tax until the day that you withdraw your funds.
The amount that you can contribute is dependent on statutory limits, your age, and your earned income. The maximum you can contribute is equal to your earned income. Earned income is income from wages and self-employment. Investment income is not considered earned income. There is also a catch-up provision for those that are 50 years old or older. This provision allows you to make larger contributions than normal. Additionally, your spouse can use some of your income to contribute to his or her account. However, if you have reached age 70 at the end of the year of your contribution then you are no longer allowed to make contributions.
Before you decide to start with a traditional IRA, it is wise to consider your other options. These options include a Roth IRA and 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).
For those that are not able to make a deduction contribution, making a nondeductible contribution is a viable option. You will still be able to enjoy tax-deferred growth on your retirement account. Additionally, if you wait until you are age 59 you can withdraw your funds and only be taxed on earnings.
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.
The total amount of your annual contribution to IRAs can never be larger than the defined limit. That being said, if you are eligible you can contribute all of your income to a traditional or all of your income to a Roth IRA. You are even allowed to split your contribution between the two different IRA?s.
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.
There are other differences as well. Traditional IRAs have required minimum distribution rules that must be strictly followed. Roth IRAs have no distribution requirements during your lifetime.
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 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. - 29970
Before you can start planning, review the retirement plans that are currently available to you. Generally, there are two categories into which all plans can be sorted: IRAs and employer-sponsored plans. IRAs are perhaps the most widely used retirement plans because they're easy to set up and maintain. You can open up one yourself it doesn't have to be sponsored by your employer and you can contribute as much (or as little) as you want, whenever you want, provided you don't exceed applicable annual limits. Following are descriptions of the three main types of IRAs:
The Traditional IRA: Your IRA assets grow on a tax-deferred basis, meaning that you pay no tax until the day that you withdraw your funds.
The amount that you can contribute is dependent on statutory limits, your age, and your earned income. The maximum you can contribute is equal to your earned income. Earned income is income from wages and self-employment. Investment income is not considered earned income. There is also a catch-up provision for those that are 50 years old or older. This provision allows you to make larger contributions than normal. Additionally, your spouse can use some of your income to contribute to his or her account. However, if you have reached age 70 at the end of the year of your contribution then you are no longer allowed to make contributions.
Before you decide to start with a traditional IRA, it is wise to consider your other options. These options include a Roth IRA and 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).
For those that are not able to make a deduction contribution, making a nondeductible contribution is a viable option. You will still be able to enjoy tax-deferred growth on your retirement account. Additionally, if you wait until you are age 59 you can withdraw your funds and only be taxed on earnings.
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.
The total amount of your annual contribution to IRAs can never be larger than the defined limit. That being said, if you are eligible you can contribute all of your income to a traditional or all of your income to a Roth IRA. You are even allowed to split your contribution between the two different IRA?s.
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.
There are other differences as well. Traditional IRAs have required minimum distribution rules that must be strictly followed. Roth IRAs have no distribution requirements during your lifetime.
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 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. - 29970
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