 | |
|
| 1. What is a traditional IRA? | |
|
|
A traditional IRA is a way for you to save for retirement while benefiting from certain tax advantages. The amount of the tax advantage varies according to whether you are an active participant in an employer-sponsored retirement plan. If you are, you may not be able to deduct some or all of your contributions, depending on your income. If you are not, you can make a contribution of up to $ in into this type of IRA (or $ if you are 50 or older) and deduct the entire contribution from your income.
| |
|
|
Created in 1974, traditional IRAs are available to anyone with earned income. However, you may not make regular contributions once you turn 70 1/2. If you have no earned income, but your spouse does, you may open an IRA and make spousal contributions.
| |
|
|
Traditional IRAs are called "traditional" to distinguish them from Roth IRAs, which became available in 1998 and have different rules.
| |
|
|
There are two types of traditional IRAs -- individual retirement accounts, set up with a bank or other financial institution, and individual retirement annuities, set up through an insurance company. "IRA" actually stands for Individual Retirement Arrangement.
| |
|
|
Through an IRA, you generally have the possibility of investing in whatever options are offered by your financial institution. Many investors choose mutual funds because of the diversification they provide, but you can also invest in individual stocks and bonds, or CDs, or other investment vehicles.
| |
|
| Top |
|
| 2. What are the tax advantages of a traditional IRA? | |
|
|
The interest your traditional IRA earns is tax-deferred, which means you don't have to pay tax on it until you withdraw the money. Thus, you benefit from compounding as your untaxed interest continues to earn more interest.
| |
|
|
In , you may contribute up to $ to your IRA (or $ if you are 50 or older). If your earned income is less than that, you may only contribute up to the amount of your earned income. If you have more than one IRA, including a Roth IRA, the total amount you may contribute to all of them combined is $ (or $ if you are 50 or older) or the amount of your earned income, whichever is less.
| |
|
|
Your contributions may be tax-deductible, which would reduce your income tax bill. This depends on whether you are an active participant in an employer-sponsored retirement plan. If you are, your income level determines whether your traditional IRA contributions will be deductible. If you are not sure whether you are an active participant in a retirement plan at work, see the question "I don't contribute to my employer-sponsored retirement plan. Could I still be considered an 'active participant'?" or ask your human resources department for more information.
| |
|
| Top |
|
| 3. Who is allowed to contribute to a traditional IRA? | |
|
|
You may contribute to a traditional IRA if you receive taxable "compensation" (earned income or taxable alimony) and you are younger than 70 1/2 by the end of the tax year.
| |
|
| Top |
|
| 4. How much can I contribute to a traditional IRA? | |
|
|
You can contribute up to $ in to an IRA (or $ if you are 50 or older). If you have more than one IRA (of any kind, including a Roth), your total contributions to all your IRAs may not be more than $ (or $ if you are 50 or older) in .
| |
|
|
If your taxable compensation for the year is less than that, you may only contribute up to the level of your taxable compensation. However, if you are married and filing jointly you may base your contribution on your spouse's taxable compensation.
| |
|
| Top |
|
| 5. When do I have to name a beneficiary? | |
|
|
You are never required to name a beneficiary. However, there are some reasons you should.
| |
|
|
An IRA is what is known as a beneficiary-designated asset. This means that if you die, your IRA funds will go directly to your named beneficiary and won't be included in the probated part of your estate. That means your beneficiary can get the money faster.
| |
|
|
Also, if you are married and your spouse is more than 10 years younger than you are, naming your spouse as a beneficiary can help you extend your IRA withdrawals. In such a case, if you name your spouse as sole beneficiary, you can combine his or her life expectancy with your own to create a joint-life expectancy.
| |
|
|
You can add or change your beneficiary at any time before your death.
| |
|
| Top |
|
| 6. I want to name someone other than my spouse as my beneficiary. Can I do that without the consent of my spouse? | |
|
|
It depends on what state you live in. Community or marital property states do require the spouse's consent. All others do not.
| |
|
| Top |
|
| 7. I inherited an IRA from my spouse. What are my options? | |
|
|
Even though the IRS simplified the rules for taking distributions from an inherited IRA in 2001, they are still complex. While this is a brief discussion of common options, it is not exhaustive and you should consult with a qualified estate attorney, accountant or financial planner to help with your situation.
| |
|
|
This answer assumes that you are named as the sole beneficiary of your spouse's IRA.
| |
|
|
Your options depend to some extent on whether, at the time of death, your spouse had already reached his or her required beginning date, which is April 1 of the year after turning age 70 1/2. That is the date by which the IRA holder must begin taking required minimum distributions.
| |
|
|
If the IRA owner had reached or passed the required beginning date, you have the following options:
| |
|
-
You may roll the money into your own IRA or elect to treat it as your own, which is in effect the same as making a rollover. In this case you can name new beneficiaries and begin taking penalty-free distributions starting at age 59 1/2, and you must begin required minimum distributions by your required beginning date. You may take penalty-free withdrawals from your IRA prior to age 59 1/2 if you qualify for an exemption under Section 72(t) of the IRS code.
-
You can leave the IRA alone, in essence creating what is known as an inherited IRA. This is an option most likely to be favored if you are under age 59 1/2 and want to withdraw money, but don't want to pay the 10 percent early withdrawal penalty. It is advisable to re-title the account to avoid any legal confusion; you should check with the IRA custodian for details. There are different rules governing how you can take the money in this case. If your deceased spouse had not reached his or her required beginning date, you may choose to a) take distributions based on your life expectancy, provided you take the first distribution by Dec. 31 of the year after the year in which your spouse died, or b) withdraw all money from the account by Dec. 31 of the fifth year after the year of death. If your spouse had reached or passed his or her required beginning date you may take distributions based on your life expectancy.
| |
| Top |
|
| 8. I inherited an IRA from someone who was not my spouse. What are my options? | |
|
|
This answer assumes that you are named as sole, primary beneficiary of the IRA.
| |
|
|
Your options depend on whether this person had already reached his or her required beginning date (April 1 of the year after turning age 70 1/2) at the time of death. When the IRA holder reaches the required beginning date he or she must begin taking required minimum distributions.
| |
|
|
If the IRA owner had reached the required beginning date, you may continue receiving payments using your own life expectancy.
| |
|
|
If the IRA owner was not yet taking required minimum distributions, you have to take distribution of the account in one of the following ways:
| |
|
-
By Dec. 31 of the fifth year after the year of the death, or
-
Over your life expectancy, or a shorter period.
| |
|
If you choose the second option, you must start receiving payments by Dec. 31 of the year following the year of the IRA owner's death. If you don't, you'll have to use the first option by default.
| |
|
| Top |
|
| 9. I don't contribute to my employer-sponsored retirement plan. Could I still be considered an "active participant"? | |
|
|
It's possible.
| |
|
|
You are considered an active participant if your employer contributes to the plan on your behalf or if you make contributions to the plan. In IRS Publication 590 Individual Retirement Arrangements (IRAs), the IRS defines an active participant. (You can find Publication 590 on the IRS Web site, at www.irs.gov.)
| |
|
|
If you decline to contribute to your employer's plan, and your employer does not make any contributions on your behalf, you are generally not considered an active participant. In that case you may make a full tax-deductible contribution to a traditional IRA.
| |
|
|
There are some situations in which you could be an active participant without realizing it. The following list is not exhaustive.
| |
|
-
Some employers automatically enroll new employees in their 401(k) plans. So, you might be a participant even if you did not fill out a deferral form. (Check your pay stub; it will show if you have been making 401(k) contributions.)
-
Your employer could make a contribution to its profit-sharing plan for all employees, including you, making you an active participant. Some employers make such across-the-board contributions after the end of the tax year, but before the tax-filing deadline, to gain an additional tax deduction.
-
If your employer has made contributions to a defined-contribution or profit-sharing plan for you that haven't vested yet (you haven't worked there long enough for them to belong to you), they still count as contributions that make you an active participant.
| |
|
If you are not sure about your status, ask your benefits or human resources department.
| |
|
| Top |
|
| 10. What is a SIMPLE IRA? | |
|
|
A SIMPLE IRA is a retirement plan designed for a self-employed individual or a small business. It works a lot like a traditional IRA except you can contribute more and employer-matching contributions are allowed.
| |
|
|
There is no salary percentage limit on contributions. Another plus is that the SIMPLE plan you set up now can grow with your company (up to 100 employees).
| |
|
| Top |
|
| 11. What is a SEP-IRA? | |
|
|
A Simplified Employee Pension (SEP) is a retirement plan designed for a self-employed individual or a small business. Contributions are made into a traditional IRA, known as a SEP-IRA, set up on behalf of each employee. Contribution limits are higher for a SEP-IRA than for a traditional IRA.
| |
|
|
The money you contribute to a SEP-IRA is tax-deductible and your investment earnings grow tax-free until you withdraw funds at retirement.
| |
|
| Top |
|
| 12. What is the low-income savers credit? | |
|
|
In the summer of 2001, Congress passed a new tax bill containing significant changes to the rules governing tax-advantaged retirement savings programs. Included in it was a tax credit targeted to low-income workers to make saving for retirement a little easier. This tax credit took effect Jan. 1, 2002.
| |
|
|
It works as follows:
| |
|
|
This tax credit is claimed on your income tax return and applies to the first $2,000 you save in an IRA. So, if you were a single filer, earned $14,500 and contributed $2,000 for the year to an IRA, you would receive a tax credit of $1,000.
| |
|
|
The credit is based on your filing status and your adjusted gross income.
| |
|
|
Here's a breakdown:
| |
|
|
| | | |
Low Income Saver's Credit -- Income and Credit Limits
| |
Credit
|
Single filer
|
Married filing jointly
| |
50 percent
|
$0-$21,750
|
$0 to $43,500
| |
20 percent
|
$21,751-$23,750
|
$43,501-$47,500
| |
10 percent
|
$23,751-$36,500
|
$47,501-$73,000
|
| |
|
| Top |
|
