RETIREMENT PLANNING IS A CHALLENGE.
Everyone has a different definition for retirement. While we all have different visions and goals for this phase of our life, one thing remains constant: planning for retirement is a responsibility not to be taken lightly.
The Economic Growth and Tax Relief Reconciliation Act of 2001 was enacted to deliver tax savings to nearly every American. In addition to tax-rate reductions, child credit increases, and other directives, the act made significant changes to retirement plan provisions.
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?
Provided that you are under the age of 701/2 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. If you and your spouse are not active participants in an employer-sponsored plan, the deductible amount maybe the lesser of 100% of income or the maximum contribution allowed.
HOW MUCH MAY 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 in each 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 59 1/2. 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?
Yes, 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.
Rollover your 401K, don't leave it behind!
As with an employer-sponsored retirement savings plan, a rollover IRA allows individuals to keep retirement assets invested in a tax deferred account, but with two additional advantages. First, an IRA usually offers greater investment flexibility including mutual funds, stocks, and bonds, as opposed to a 401k that is usually limited to a smaller core line up of investment choices chosen by an employer. Second, an IRA can provide greater flexibility when people are ready to start receiving retirement income.
Rolling a 401k into an IRA can be a strategic move, because it is tax free transfer, there is no penalty, and an IRA typically provides more investment choices when compared to most 401k's. People who leave money in a previous employer's 401k plan often forget the money is even there, This can result in falling balances as neglect results in goals and strategies falling short of an individual's savings objectives and risk tolerance.
