The IRA was introduced in 1974 as a retirement savings tool. Over the years, the contribution limits have increased. For 2011, the IRA contribution limit is $5,000 for those 49 and younger and $6,000 for those 50 and older.
Establishing an IRA and regularly contributing to it can be a smart investment for the future. Two of the most common types of IRA’s are the Traditional and the ROTH. When choosing which vehicle works for you, consider whether you would like to defer taxes now or later. Traditional IRAs may offer tax deductions while distributions are taxed upon withdrawals. Annual contributions to a Roth IRA are not tax-deductible, but distributions of contributions and qualified distributions are tax-free.
The Traditional IRA is funded with deductible contributions based on your compensation. Deductibility is dependent on income and participation in an employer-sponsored qualified retirement plan. Once an individual reaches 70 ½, contributions cannot be made to an IRA account and minimum distributions are required to be withdrawn.
If both the individual and spouse on a joint return are not covered by an individual plan, each may take a full deduction of the lesser of $5,000 or 100 percent of compensation, plus any applicable catch-up limit if age 50 or older. If either the individual or the spouse is covered by an employer plan the deductibility is phased out depending on the individual’s filing status, adjusted gross income and who is covered.
A ROTH IRA is an IRA whereby an individual makes nondeductible contributions based on their compensation. Annual contributions are not tax-deductible, but qualified distributions along with their earnings are tax-free. There are eligibility limitations and phaseouts. The individual does not need to be under 70 ½.
Contributions can be made anytime during 2011 all the way up to April 15th, 2012.
For more information, please call Julie M. Sturgeon at 661-251-6031 or visit the website at www.santaclaritatax.com.
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