Individual Retirement Accounts

Phillip Wasserman

Phil Wasserman meets frequently with people who have questions about Individual Retirement Accounts (IRAs). He wanted to explain the various types of IRAs and the details included. some of the things in this article that Phillip Wasserman will go over include; traditional IRAs, Roth IRAs, Simplified Employee Pensions (SEP), and the characteristics associated with them.

Traditional IRAs:

A traditional IRA allows a maximum tax deductible amount of either $5,500 per individual or $11,000 for couples. Which ever is the lesser amount.  The income and gains earned in the account are tax deferred until you start withdrawing money from that account. You cannot withdrawal money from your account until the age of 59 and 1/2 without receiving a 10% penalty from the IRS. The Economic Growth and Tax Relief Reconciliation Act of 2001 permits people age 50 or higher to make catch-up contributions of an additional $1,000 which enables people to be able to save more money for retirement. However, you are not allowed to make a contribution after the year you turn 70 and 1/2.

Roth IRAs:

Created by the Taxpayer Relief Act of 1997, Contributions of a Roth IRA are not tax deducible. Contributions may always be withdrawn tax free because they were made with nondeductible contributions. Contributions are the same as a traditional IRAs and you are allowed to make catch-up contributions after age 50. Unlike Traditional IRAs, you can make a contribution after age 70 and 1/2 as long as you have earned income.

Simplified Employment Pensions (SEP IRAs):

Simplified employee pension plans (SEPs) offer self-employed persons and small business easy-to-administer pensions. A SEP is a qualified plan which allows an employer to contribute money directly to an individual retirement account set up for each employee. to be eligible, an employee must be at least 21 years old have performed services from the last three to five years and received a payment amount of at least $550. A SEP allows an employer to contribute 25% of an employees salary to the employees SEP IRA each year up to a maximum of $52,000. Employer contributions are tax deductible to the employer. contributions are not taxable to an employee until they are withdrawn with earnings growing tax deferred.

Withdrawals from Traditional IRAs and SEP IRAs:

After age 59 and 1/2 distributions may be taken without penalty. However they must be taken at age 70 and 1/2 this is referred to as a Required Minimum Distribution or RMD. There is an exemption to withdrawals earlier than age 59 and 1/2, this is called rule 72t. This is known as the substantially equal periodic payment exception. If you receive an IRA payment as least annually on your life expectancy, withdrawals are not subject to the 10% tax penalty.

Note: There is no RMD or contribution age limit for Roth IRAs.

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