Author Box
Articles Categories
All Categories
Articles Resources

Tax Time: What About Your Individual Retirement Account?

January 30, 2012 | Comments: 0 | Views: 129

An Individual Retirement Account (IRA) is a great retirement savings tool for most individuals. Created by the federal government, IRAs can be funded during your working years. During retirement, IRAs may help supplement your Social Security benefits. Your retirement savings can begin with your annual IRA contribution.

If you are under age 50, the current maximum annual contribution amount is $5,000. For those 50 years and older, an additional $1,000 can be contributed. If turning 50 this year, you are now eligible to contribute $6,000. The contribution amounts are adjusted for inflation each year by the federal government.

IRAs come in two types: Traditional and Roth. To determine which one is best suited for your annual contribution, here are some key factors to consider:

Advantages to a Traditional Deductible IRA:

Tax Deductible: Your contribution is deductible on your federal income tax return for the year in which you contribute. Tax-Deferred Growth: Your contribution grows tax deferred until you withdraw the money. This means you do not pay any taxes while your money is growing.

Limitations to a Traditional Deductible IRA:

Adjusted Gross Income (AGI) Limitations: The amount you can deduct is limited based on your AGI and if you participate in your employer sponsored retirement plans. Your contribution may be fully deducted on your income taxes, partially deducted or not deductible at all. 10% Penalty: The 10% penalty is used to encourage IRA owners to keep their money in their IRA until reaching age 59 ½. If you withdraw any of your money prior to age 59 ½, then you will incur a 10% penalty on your withdrawal amount. There are some exceptions to the rule: educational expenses, first time home purchase and certain medical expenses.

Advantages to a Roth IRA:

Avoid Taxes in the Future: Roth IRAs grow tax-free. Therefore no taxes are due when you withdraw your money. No Required Minimum Distributions (RMD): Roth IRAs do not require RMDs after age 70 ½, so your money can continue to grow with the potential for larger dollar amounts to leave to heirs.

Limitations to a Roth IRA:

Adjusted Gross Income (AGI) Limitations: For high wage earners (2011 limits for single filing over $122,000 and married filing jointly over $179,000), Roth contributions are not allowed. Disqualified Distributions: The earnings in your Roth must remain in the account for 5 years (known as the 5 year clock) and until you reach 59 ½ years old. A 10% penalty will be applied on earning distributions that do not meet these requirements.

Always consult a financial planner or IRS publication 590 before you make your final IRA decision. Making the correct IRA choice now can benefit you down the road in your retirement.

Kimberly J. Howard, CFP®, CRPC®, ADPA® is a Certified Financial Planner and the owner of KJH Financial Services, a Fee-Only practice located in Needham, MA (781-413-4879). Please visit us at or email Kim at

Source: EzineArticles
Was this Helpful ?

Rate this Article

Article Tags:








Forex dealing is dealing in currency trading and basically includes dealing in foreign exchange while the stock market dealing is the dealing of stock in a standard market market. The two types of

By: Anil Mali l Investing > Stocks l October 25, 2012 lViews: 243

Investments in silver metal can be done by several ways. The article talks about the best ways of silver investments. Silver, the precious metal has always attracted investors for several reasons.

By: Kyles Humphrey l Investing > Gold Silver l August 17, 2012 lViews: 304

The article offers reasonable reasons for high oil prices. Crude is indispensable and it is a great source of energy. The prices on oil keep on altering, sometimes it is too high and sometimes it

By: Kyles Humphrey l Investing > Stocks l August 17, 2012 lViews: 286

Many investors are unaware of new tax that will be levied as part of the Supreme Court’s decision to uphold President Obama’s health care reform. The investment tax, as it is being referenced,

By: Ben Esget l Investing > Retirement Planning l July 17, 2012 lViews: 404

A few months ago, I was at Starbucks talking to someone about stocks and bonds, he and his wife had worked hard and were worried about the stock market. They wanted something much less risky. He

By: Lance Winslow l Investing > Stocks l July 11, 2012 lViews: 433

The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.

By: Lawrence Tepper l Investing > Retirement Planning l July 10, 2012 lViews: 240

There cannot actually be a winner when you compare 401k versus Roth IRA, as they both have their set of advantages and drawbacks. Even when you consider the unique feature of self-directed 401k plan,

By: Mark G Millerl Investing > IRA 401kl May 16, 2012 lViews: 202

Most adults have completed a beneficiary designation at some point. We complete the forms when we are hired or become eligible for the company 401(k) Plan and then we forget about them. But your

By: Stacey L Spencerl Investing > IRA 401kl May 04, 2012 lViews: 173

Many employers offer some kind of retirement plan that allows the employees to save for retirement on a regular basis out of their paycheck, most of the times on pre-tax basis allowing employees to

By: Dan Georgel Investing > IRA 401kl May 01, 2012 lViews: 167

If you have money locked up in a 401k account you may be able to use it to help buy a house. A 401k loan offers a way to use the money in your 401k without triggering taxes and penalties.

By: Brian E Nelsonl Investing > IRA 401kl April 29, 2012 lViews: 179

Many companies offer to match an employee's contribution into their 401(k) plan. If this is available to you, you must take advantage of it as it is "free" money. Don't delay, start today!

By: Chris Borgl Investing > IRA 401kl April 17, 2012 lViews: 177

A 401k is an excellent retirement plan and most people are taking it up with several financial providers that cater to this plan. Investing for retirement is a crucial step especially in the present

By: Jeremy Wongl Investing > IRA 401kl April 10, 2012 lViews: 153