Sunday, January 15, 2006

IRA (Individual Retirement Account)

IRAs were established under federal tax law to encourage the average wage earner to prepare for old age income by sheltering savings from taxes. Up to $2,000 of annual earnings ($2,250 for couples with one wage earner) can be invested in IRA accounts at this time. The interest income that is invested in IRA accounts does not have to be included in taxable income. Participants must pay a 10 percent penalty if they draw on their accounts before age 59.5. The invested funds collect tax protected interest over the years. Investors are required to begin withdrawal in the year they reach 70.5. Retirees are taxed on the withdrawals, but usually at a lower rate since their tax bracket is probably lower than during their working years. People who wish to take deductions from their federal income taxes for IRA contributions should obtain the appropriate Internal Revenue Service publication and follow the instructions, however the basic rules can be summarized briefly. The deduction limit is $2000, and this amount may be reduced or eliminated depending on two factors: whether the individual or the individual's spouse is covered by an employer retirement plan; whether the individual's income exceeds specified limits.
Various rules apply to income limits depending on the individual's filing status as a single head of a household, married and filing joint return, or married filing separate returns. For the single person the allowable deduction is reduced beginning with a modified Adjusted Gross Income of $25,000, and it is eliminated for incomes above $35,000. For married couples filing jointly the reduction begins at $40,000 and is eliminated at $50,000 and for those filing separately the reduction range is 0 to $10,000.
Proposals have been made for restoring the full deductibility of IRA contributions for all income levels, and, in any case, tax rules change nearly annually. Taxpayers, therefore, need to contact the Internal Revenue Service or work with a qualified tax accountant to learn about changes.
The source on the above IRA information is: Internal Revenue Service, "Individual Retirement Arrangements (IRAs) for use in preparing 1990 Returns," Washington, D.C.: Internal Revenue Service, 1990. Publication 590, Catalog Number 15160X. p. 5.
Crichton, J. The Age Care Sourcebook. New York: Simon and Schuster, Inc. 1987.

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