The Individual Retirement Account (IRA), in some cases is also termed as an Individual Retirement Agreement, is a term that signifies retirement plans, retirement savings, and also gives the benefit of tax deduction. Some of the plans, policies, accounts and savings that are included in an Individual Retirement Account include, individual accounts, trusts or custodian accounts.
Life insurance and annuity also come under the scope of this concept. Government, federal and state have arranged compliance and rules to govern the factions that are included in the scope of the IRA. The Internal Revenue Service (IRS) discloses all IRA information, acts, laws and norms, along with the amendments.
About Individual Retirement Accounts
In the year 1974, the Employee Retirement Income Security Act (ERISA) was passed, which established the conception of retirement accounts for the benefit of taxpayers. The provisions of retirement accounts are applicable for Roth IRA, traditional IRA, SEP IRA, simple IRA and self-directed IRA.
There are some other types of accounts also such as the Educational IRA (now officially known as Coverdell Education Savings Account). The individual account, is specifically a Roth IRA or a traditional IRA account, the other types of accounts being provided by the employer, are provided for education or other such purposes.
In the year 2002, a provision to increase the limit of contribution was initiated according to which people above 50 years of age could contribute additional money on the basis of 'catch up contribution'. As of 2010, the amount that can be contributed to an IRA is $5000 per annum for people who have not crossed 70 years of age. People below 50 can contribute up to $10,000.
These were the basic features about an Individual Retirement Account. The account can be opened with any recognized financial institutions, and has no taxation upon contribution, the withdrawal and proceeds are however subject to tax implications.
Individual Retirement Account Rules
There are some primary IRA rules that every individual can benefit from. As mentioned above, IRA provisions benefit the taxpayers, so that they can save up for their retired life. As per the traditional rules, if you are a person filing your income tax return as an individual or as a head of household, then a full deduction of the contributed amount can be availed, if your adjusted gross income is less than $55,000. In cases where the income is between $55,000 to $65,000, a partial deduction can be claimed. In cases where the income exceeds $65,000, no deduction can be availed.
Married people are given a considerable advantage in such scenarios, as a deduction uptil $89,000 can be availed. Just like the individual filing, a partial deduction can be availed between the limits of $89,000 to 109,000. In cases where the income exceeds the upper limits, no deduction can be availed.
Now in cases of married IRA contributors and participants, when one person is not a participant but the other is, the limit for full deduction is $162,000. The partial deduction limit is $172,000 above which no deduction is permitted. Note that the limits are derived after the taxable of incomes or adjusted gross income of both the spouses is computed. In cases where married people file separately the deduction limit comes up to $10,000.
The aforementioned limits of contribution are also applicable for retirement planning. A person who wants to save and invest more can do so, but no tax deductions can be availed.
Withdrawal from the account is possible only after 59 and a half years of age. The IRA withdrawals before the said age is penalized, and any withdrawal before or after the said age is subject to income tax. Medical expenditures that account for more than 7.5% of the total income, federal unemployment benefits for more than 12 weeks, first home purchase, etc. are some of the common expenditures that exempt a penalty.
These are traditional rules of an IRA, and they tend to differ from account to account and person to person. Hence before taking any financial decision, make sure that you confirm the facts and rules which are dynamic and are subject to change.