Traditional IRA - Simplest retirement plan for self-employed looking for tax benefits
The traditional IRA or individual 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 traditional IRA?
In 2011, the adjusted gross income or 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 $110,000.
Your filing status is single or head of household, and your AGI is more than $56,000 but less than $66,000.
If your tax filing status is married filing separate returns, then your deductible phase out starts at under $10,000.
If both you and your spouse work and 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 both your 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 is that 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 limits for 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 for a traditional IRA?
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 traditional IRA?
You can set up a traditional IRA any 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.