Traditional Individual Retirement Accounts (IRAs) are personal retirement plans that can provide a tax deduction for the contributors. Money contributed to traditional IRAs can grow without requiring that you pay income taxes on the profits until the money is removed from the account, unless it is rolled over to another qualified retirement account. So both the untaxed contributions and profits are taxable when they are taken out of the account. In addition any withdrawals before the account holder turns 59 ½ years old can be subject to an additional 10% early withdrawal penalty.
Contributions: IRAs are separate individual accounts, they are not eligible for joint accounts. For an individual to contribute to an IRA they can be any age as long as they do not reach 70 ½ years of age before the end of the tax year. To qualify you must have taxable compensation and if married filing joint either you or your spouse must have taxable compensation. For additional information on taxable compensation see IRS topic 451.
-In 2010 if you are under 50 years of age by the end of the tax year you may be able to contribute up to $5,000 or the amount of your taxable compensation.
-In 2010 if you are over 50 but less than 70 ½ years of age by the end of the tax year you may be eligible to contribute up to $6,000 or the amount of your taxable compensation.
You contributions can also be limited if you are covered by a retirement plan at work. Also, your allowable contribution may be affected by your modified adjusted income. For more information on contribution limits see the chart provided by the IRS. Generally speaking if you and your spouse are not covered by a retirement plan at work you are eligible to contribute up to the limit or your taxable compensation and qualify for the tax deduction.
Due Date: Contributions are due .
Required Distributions: Participants who reach the age of 70 1/2 years of age are required to take annual minimum distributions from their IRAs. If a person required to take a minimum distribution does not do so they may have to pay an excise tax up to 50% of the amount not distributed as required.
When a plan holder dies before required minimum distributions have begun their heirs will have required distributions. The heirs generally must receive the entire amount of the plan within five years of the owner’s death or over the beneficiary’s life starting within one year of the owner’s death. For information on required distribution amounts see the IRS website.
Early Distributions: As mentioned previously early distributions, before you turn 59 1/2, can be subject to an additional 10% early withdrawal penalty. There are several exceptions to the early distribution penalty including if you have inherited the IRA, if you are disabled, if you have unreimbursed medical expenses that exceed 7.5% of your adjusted income or if the distributions do not exceed the cost of your medical insurance. For a complete list of exceptions see the IRS website. Also, if you need money to finance a business venture consider that you may have other options than taking withdrawals from your IRA. Give me a call at 972-439-1955 if you have this situation.
Considerations: Before making IRA contributions you should consider “can I afford to make this contribution?” In other words, you should consider do I need this money now or will I need it before I turn 59 1/2 years of age. Take a look at your overall financial picture. Do you have debts that need to be paid? What would happen if you became unemployed for an extended period of time? If you work with a financial adviser it would be beneficial to go over these points with them. Also, you want to look at your expectations for your retirement and plan to have access funds that will be taxable and those that will not be taxable to minimize your taxes and maximize your available money to live off of during retirement. If you would like to discuss these issues with me feel free to give me a call at:
Jeff Haywood, CPA
These posts provide highlights that may be of interest to taxpayers. For complete information on these subjects check with the IRS and your financial consultants.
I prepare the following types of tax returns:
Federal and State Returns
Also, I am available for tax planning and discussions about business, retirement planning and life goals.
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As always keep in mind that the content provide on this site is general in nature and may or may not apply to your particular case. It is best to check with a tax professional about your circumstances and what is best for you personally. Also, IRS regulations and tax laws are constantly changing and the information on this site is not constantly updated. Again please check with me about your particular circumstances and what will be best in your situation at the given time and law.
This article was written by Jeff Haywood, CPA.
Jeff is a licensed CPA in both Texas and Illinois.
He has prepared income tax returns for the public for over 10 years.
He also has an MBA in Finance from Loyola University in Chicago and he has 24 years experience in Corporate Finance and Business Analysis.