Traditional IRA –
retirement plan for self-employed looking for tax benefits
The traditional IRA or
retirement arrangement is a simple personal savings plan which allows
you to set aside money for the time you would retire. The best part
is you get you tax advantages while you save. It is easy to set up
this Plan with help from any bank of financial institution, a mutual
fund, or a life insurance company.
What are the income
limits to the
In 2011, the adjusted gross
AGI contribution limits for traditional IRAs were raised. If you are
covered by a retirement plan at work, then your tax-deductible
contribution to a traditional IRA is phased-out if:
Your filing status is
married filing jointly, and your AGI is more than $90,000 but less than
Your filing status is
single or head of household, and your AGI is more than $56,000 but less
If your tax filing status is
filing separate returns, then your deductible phase out starts at
If both you and your spouse
both have taxable compensation, each of you can contribute to a
separate traditional IRA. In addition, subject to certain
limitations, if you file a joint return, each of you can contribute
to a separate traditional IRA based on your combined compensation,
even if one of you has little or no compensation.
Your total contribution to
IRA and the spousal IRA for this year is limited by certain factors
such as your taxable compensation, contributions to a traditional or
Roth IRA and your age.
The only thing of importance
your self-employment earnings should be at least as much as the
amount you intend to contribute to your IRA. The contribution rules
are simple to understand and the account is possible if neither you
nor your spouse is covered by another retirement plan (such as a
401(k) or pension) during the year. But if you have another
retirement plan covering you or your spouse then you would have to
check the income limits for contributions to IRA and for deductions
for income tax.
What are the contribution
a traditional IRA?
The limit is same for 2011
as in 2010
which is $5,000. The catch up contribution for those who are 50 years
old or older by the end of 2010 or 2011 will remain at $1,000.
What are the tax rules
If you are qualified to go
for a tax
deductible contribution then, the money funded into the traditional
IRA grows tax deferred till you retire. Income tax is levied upon the
amount you withdraw each year. Check with brokerage firms near you.
They would offer you low-cost IRA. Distributions from a traditional
IRA are fully or partially taxable in the year of distribution. If
you made only deductible contributions, distributions are fully
taxable. Use Form 8606 to figure the taxable portion of withdrawals.
Distributions made before the age of 59 years and six months would be
subject to a 10 per cent penalty. You also may owe an excise tax if
you do not begin to withdraw minimum distributions by April 1st of
the year after you reach age 70 1/2.
What is the last date to
set up a
You can set up a traditional
time but the contributions have to be made by the due date for filing
your return for that year which is April 15. But you cannot make
contributions in the year you reach 70 years of age and afterward.