IRA Basics

What is life security? Are you in your middle ages now, at the peak of your carrier, earning money and want to invest it for future dispense? Are you confident that you have enough savings when you reach your premium age? What’s your life expectancy and do you relish enjoying your savings before you reach that stage? Everyone is entitled to life security, hence, the government made sure that each and everyone will enjoy this benefit once they reach their optimum age by provisioning bills for retirement plans.

What is IRA?

The traditional Retirement Account (IRA) started when congress passed the bill of Employee Retirement Income Security Act (ERISA) in 1974. Its main purpose is to give employees without pension coverage the chance to save for their retirement. All the contributions for IRA are fully taxed-deferred until such time that funds are withdrawn, and a 10% tax is imposed if these funds are withdrawn before the age of 59.

Through the years congress have been rectifying and amending this bill to suit the needs and the demands of employee retirement services. And to more explain these revisions here is a brief summary of the IRA rules for each revision.

Traditional IRA

This was established by the Tax Reform Act (TRA) of 1986, and its main advantage was that all the contributions of members are often tax-deductable and they can get it immediately. However this retirement plan forces distributions according to age and withdrawals must begin at the age of 70 ½ before the end of the calendar year otherwise IRS has the ability to confiscate half of the mandatory amount.

In Traditional IRA there are two eligibility rules that you must comply. First at end of the calendar year you must be 70 ½ years old. Second, you must contribute in a form of compensation such as your wages, salaries, bonuses, and commissions.

In 2009 and 2010, $5000 is the standard IRA contribution rules for IRA. However, there’s a catch up limit, you are eligible for a catch-up contribution of $1000 if you’ve reached the age of 50. Meaning to say your contribution will be at $6000. This will be revised in the years to come depending on the index of inflation.

There’s a simple rule that applies when it comes to withdrawing your funds with IRA. The IRA withdrawal rules state that you need to wait until you reach 59 ½ before you can withdraw so as you won’t incur the 10% additional tax penalty.

Also, the traditional IRA’s has the minimum distribution rule which enables people ageing 70 ½ to calculate how much to withdraw each year making their balance at IRA at zero rate before they reach their expectancy age.

Roth IRA

Is established by the Taxpayer Relief Act of 1997 and was named after its sponsor named Senator William Roth.  One of the advantages of Roth IRA over the Traditional Ira is that it has fewer withdrawal restrictions and requirements. Hence, all you need to have is a form of compensation and there isn’t any limit to contribute.  The standard Roth IRA rules on the contribution limit is the same with traditional IRA which is $5000 and when you reach 50 or above you are still entitled to a catch up contribution of $1000. You can withdraw all your contributions tax free at anytime provided contributions where made before you reached 59 ½ and that are withdrawn after the seasoning period with is every 5 years. However, it has been said that  taxpayer who opted to participate in Roth IRA will likely pay higher tax on their contributions.

Simple IRA

Simple (Savings Incentive Match Plan for Employees) IRA is set up to be a employer provided plan for employers, with more than 100 employees, to set aside money and invest it to grow for later use.  In Simple IRA rules requires a minimum contribution per employer which is currently at $11,500 of this year. Tax payer over the age of 50 also has the catch-up contribution of $2,500. However, there’s a immense penalty of 25% of the entire contributions for those who wishes to withdraw their contributions before 2 years from the date of the first contribution and also a 10% penalty for contributors below 59 ½ who wishes to make withdrawals.

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