There are two kinds of Individual Retirement Accounts. The first is a Traditional IRA, which is essentially a savings account with benefits of “tax deferral”. This means that you put your money into the account and don’t pay taxes until you begin your “retirement” and start to take the money out. Certain tax advantages include the ability to deduct your contributions now on your tax returns. Depending on your tax bracket, your accountant or investment advisor can give you good advice as to your particular circumstance, you may be able to deduct a portion of your deposits to these accounts, which is based on your adjusted gross income.
The main benefits of the Traditional IRA work best on funds that are pre-tax. This means income tax withdrawals for federal and state taxes have not yet been taken out. Many employers offer 401Ks. However, when you leave your employer you will need to put the money into a similar type of retirement account or your savings will be taxed at your current rate of taxation. The 2012 allowable contributions are $5,000 and $6,000 for those over 50.
The Second kind is the Roth IRA. The main difference between the two is with the Roth your contributions are non-deductible, but have the power to grow tax-free. The Roth enjoys the same allowable contributions as the Traditional version.
With the Traditional IRA, if you have earned income, you are eligible to contribute. Even is you don’t have earned income, you can still contribute if your spouse has earned income and you file your taxes as married filing jointly. You must stop making contributions at the age of 70.
With the Roth IRA, if you have earned income, or your spouse has earned income and you file your taxes as married filing jointly, you can contribute at any age as long as your modified gross income (MAGI) falls below or within certain limits. The limits for 2012 for married filing jointly are Income less that $173,000 you can make full contribution. Income of $173,001 to $182, 999 you can make a partial contribution. With an income of more than $183,000, you cannot contribute. For individuals it breaks out like this: Income less than $110,000 = full contribution. $110,001 to $124,999 = partial contribution. $125,00 + = no contribution.
Although funds can be distributed from an IRA at any time, there are limited circumstances when money can be distributed or withdrawn from the account without penalties. Unless an exception applies, money can typically be withdrawn penalty free as taxable income from an IRA once the owner reaches age 59 and one half. Additionally, non-Roth owners must begin taking distributions of at least the calculated minimum payments by April 1st of the year after reaching age 70 and one half.
Please seek the advice of your professional accountant and an investment specialist is determining your situation and the best way to maximize the benefit of these wonderful retirement plans.