Individual Retirement Arrangements (IRAs)
2/2/2004
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An individual retirement arrangement (IRA) is a personal savings plan that offers tax advantages for individuals to put money aside for retirement. While there are Roth and regular (or "traditional") IRA’s, we discuss the “regular” one here and simply use IRA as its name.
Generally, one must have earned income (including alimony) and be under the age of 70 ½ to make contributions into an IRA account. A spouse of a taxpayer who qualifies to make an IRA contribution, if filing their tax return jointly, can also make an IRA contribution even if the spouse does not have earned income.
For year 2004, the maximum contribution to an IRA account is $3,000 each. Anyone who has attained age 50 by the end of the year can make an additional $500 contribution for the year. The deadline for making an IRA contribution is always April 15th of the following year.
Deductions from one's income for contributions made into an IRA account may be reduced (“phased-out”) or disallowed if a taxpayer actively participates in an employer sponsored retirement plan (such as a qualified pension, profit-sharing, stock bonus plan, SEP, SIMPLE or qualified annuity plans, etc).
Whether a taxpayer is an active participant of those plans sometimes could be a “tricky” issue. For example, one is considered an active participant in a defined benefit pension plan if the taxpayer is not excluded under the plan’s eligibility test even he declines to participate.
For single taxpayers who are “active participants”, the maximum deductible contribution into an IRA for 2004 starts to “phase-out” when his or her adjusted gross income (AGI) exceeds $45,000. There will be no deduction when the AGI reaches $55,000.
For married filing jointly and both are “active participants”, the phase-out starts at $65,000 of AGI and there will be no deduction allowed when AGI reaches $75,000.
However, the allowed deduction for a non-covered spouse will not start to phase-out until the couple’s combined AGI reaches $150,000 and no deduction allowed when the AGI reaches $160,000. (If a married couple files tax return separately, the maximum contribution is reduced right from $10,000 of AGI if either spouse is an active participant).
Now, if you need to find out more about how the IRA works, such as under what circumstances you can withdraw the money from the account without paying penalties even before you reach the age of 59 ½, or how to minimize government's mandatory distributions, please contact us for a 30-minitures free consulting.
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