IRA Retirement Plans

IRA (Individual Retirement Account) plans are among the most preferred options of ensuring a steady income after your retire. An increasing number of senior people and retirees in the US are opting for these plans to insure their future against any uncertainty.

With increasing catch-up contribution and limits, it has become much easier for the investors to save even more after retirement and as the earnings on IRA account are tax-deferred thus money increases more quickly than in a non-retirement account.  

Various kinds of IRAs are : -

  • Traditional IRA
  • Roth IRA
  • SARSEP
  • SIMPLE IRA


Traditional IRA

The traditional IRA Plan is  one of the safe yet lucrative ways to add more funds to your savings. Opt for a traditional IRA account now and enjoy the benefits.

The traditional Individual Retirement Accounts provides you with good increase on your funds. In addition to the financial benefits, those who are covered under the account can also enjoy tax benefits on the amount that they are saving. Though all these features, one can really stay secure and have steady flow of funds even after retirement. 

Advantages: 

One of the main advantages of the traditional IRA plan is the tax exemptions of the contributions that you make to the account. Other type of transactions that you make into the account such as capital gains, dividends, interests and so on are not subjected to taxation until you withdraw the money from the account. The taxes are applicable only after you withdraw the money from the account.

The traditional IRA can also be fully deductible if it is covered under various other types of plans like 403b, STRS, 401k, PERS and so on. However, the terms and conditions of the plan are based on the income, other retirement plans and financial plans.

If the taxpayer falls under the lower tax bracket after retirement compared to the years when he or she was working, the traditional IRA can be an ideal choice. The plan provides a very good financial boost to the lower income groups.

If you are covered under the traditional IRA plan, you can enjoy the benefits of tax exemptions at once.

Compared to other retirement plans, the risk factor involved in the traditional IRA is much lower. The plan is not so dependant on the market swings and economic changes.

Eligibility:
For contributing money into your traditional IRA account, you need to be younger than 70 ½ years. You can make the contributions any time of the year. The Form 1040 or Form 1040A is available which allow you to know whether you are liable to any type of tax benefits. It is better if you have any type of taxable income such as tips, commissions, salary, and wages and so on. 

Limits of Income:

There are some income limits involved to maintain a traditional IRA plan. Some of them are:

  • If married couples are filing for the account on a joint basis, the Adjusted Gross Income needs to be between $83,000 and $103,000 as per 2007
  • If you are married but file for the plan separately, your modified AGI needs to be between $0 and $10,000
  • In the lower limit, the tax payer can enjoy deductions of the full yearly contributions. However, this provision is not allowed in case of the upper limit. The rate of deduction is reduced according to the income of the tax payers
  • You are not allowed to take any loans or borrow from your traditional IRA account. Your account will be disqualified if such case takes place 

More and more number of retirees and the aged across the US prefer the traditional IRA account because they are safe and secure.

 

Roth IRA

For saving money and also enjoying tax benefits, opt for the SIMPLE IRA plan. It is a type of an Individual Retirement Account which provides compounded increase on your savings and is also entitled to a number of tax benefits. Get the benefits of the SIMPLE IRA and enjoy financial stability even in the post retirement period.

The term SIMPLE is referred to as the Savings Incentive Match Plan for Employees. It is mostly an employer sponsored plan for the employees. Even self employed people can also opt for the plan to enjoy various types of tax benefits. Apart from these, partnership firms can also opt for the SIMPLE IRA plan. 

Eligibility:

There are some eligibility criteria that are required for making the plan. Some of them are:

  • The employer needs to employ around 100 or lower employees who had earned an amount of at least $5,000 during the earlier year. All the employees who are based in the job during the calendar year are taken into account.
  • For taking part in the plan, the employee needs to get a compensation of at least $5,000 for any two years. Once such conditions are fulfilled, you are eligible to be covered under the plan.
  • While maintaining the SIMPLE IRA plans, the employer should not hire more than 100 employees. 

Advantages:

The SIMPLE PLAN is funded on the basis of pretax salary reduction. Like the various other retirement savings plan, the deductions made here are also entitled to Social Security, Medicare and other benefits. Compared to the other employer sponsored plans, the limits of contribution are lower in SIMPLE plans. The administration costs are also lower and can be easily handled.

Unlike the other retirement plans, the employees need not contribute regularly into the SIMPLE IRA account.

A minimum limit of contribution is required on the part of the employer. He or she can either make matching contributions or one can as well make a flat 2% contribution of the compensation to the employees. For the second option, the employees need to get at least $5,000 for the given year.

People who have attained the 50 or over can also enjoy a catch-up provision and enjoy better benefits. However, compared to the other plans, the catch-up provision is $2,500. 

The SIMPLE IRA plan can also be funded with a basic IRA or a 401(k) plan. One also cannot change the plan into a Traditional IRA without being entitled to a wasting period. The wasting period is the period of two years from the date when the employees first took part in the plan.

Limits: 

The limit of contribution in the plan SIMPLE IRA for the year 2009 is $11,500 compared to $10,500 for the year 2008. The deferral contributions need to be deposited into the account by the 30th day which follows the month for which the deferral is applied. Employees who are eligible can defer the full amount of their compensation up to the annual dollar limit by being covered under the plan.


SARSEP(Salary Reduction Simplified Employee Pension Plan)

SARSEP is a special type of Individual Retirement Account which provides good benefits to the employees, retirees and the older adults. It is also referred to as the Salary Reduction Simplified Employee Pension Plan and provides a wonderful alternative to the 401(k) plan.

The plan is applicable for organizations and companies which consist of 25 or lesser employees. The employers as well as the employees can make contributions into the SARSEP IRA plan.

The contributions that you make are done on a pre tax basis in the form of salary reduction. Under the tax laws, the employers are not allowed to establish a new SARSEP plan. However, one can include new employees into the plan. The rules and regulations of the plan are more or less similar to the traditional IRA plan. By contributing to the account, the employees can reduce the new income of the current year.

Tax benefits

By being covered under the SARSEP plan, both the employers and employees can get some tax benefits. Some of the benefits are:

  • The employees are allowed to make the pre-tax contributions to their account in the form of salary reductions every year.
  • The investments that you make are tax deferred until the money is withdrawn from the account. After you withdraw the money from the account, taxes are applicable.
  • The cost of administration of the accounts is also low compared to other retirement plans.

Contribution features

In order to be covered under the SARSEP plan, the contribution of the employer should not be more than the 25% of the employee compensation. It can also be $49,000 for the year 2009.

The employee contributions should be more or less same as the salary reduction agreements. It should not be more than $16,500 for the year 2009.

If the employee is 50 0r more years of age, he or she may be entitled to catch-up contributions. For the year 2009, the maximum amount of the catch-up contribution is $5,500.

Another good feature of the SARSEP plan is that it can be also used to make the annual IRA contributions. The upper limit of the IRA contributions for the year 2009 is $5,000.

Terms and conditions

In case of the SARSEP plans, there are some conditions that you need to follow. They are:

  • The contributions of the employer can be done on the basis of the employer’s tax filing deadline which may also consist of extensions.
  • The salary reduction contributions need to be made for the particular year from which the issue of the paycheck was done.

One needs to attain the age of 59 ½ or more for withdrawing the money from the SARSEP account. If you make the withdrawals before reaching the said age, the IRS will impose 10% penalty on the distributions in addition to the taxation procedures.

In case of any adoption in the SARSEP plan, the employees should receive detailed notification of the same. The notice should be written in ways that is easily understood.

More and more people in the United States prefer the SARSEP account because they are safe and secure, yet provide steady income.

SIMPLE IRA plan

For saving money and also enjoying tax benefits, opt for the SIMPLE IRA plan. It is a type of an Individual Retirement Account which provides compounded increase on your savings and is also entitled to a number of tax benefits. Get the benefits of the SIMPLE IRA and enjoy financial stability even in the post retirement period.

The term SIMPLE is referred to as the Savings Incentive Match Plan for Employees. It is mostly an employer sponsored plan for the employees. Even self employed people can also opt for the plan to enjoy various types of tax benefits. Apart from these, partnership firms can also opt for the SIMPLE IRA plan.

Eligibility 

There are some eligibility criteria that are required for making the plan. Some of them are:

  • The employer needs to employ around 100 or lower employees who had earned an amount of at least $5,000 during the earlier year. All the employees who are based in the job during the calendar year are taken into account.
  • For taking part in the plan, the employee needs to get a compensation of at least $5,000 for any two years. Once such conditions are fulfilled, you are eligible to be covered under the plan.
  • While maintaining the SIMPLE IRA plans, the employer should not hire more than 100 employees.

Advantages

The SIMPLE PLAN is funded on the basis of pretax salary reduction. Like the various other retirement savings plan, the deductions made here are also entitled to Social Security, Medicare and other benefits. Compared to the other employer sponsored plans, the limits of contribution are lower in SIMPLE plans. The administration costs are also lower and can be easily handled.

Unlike the other retirement plans , the employees need not contribute regularly into the SIMPLE IRA account.

A minimum limit of contribution is required on the part of the employer. He or she can either make matching contributions or one can as well make a flat 2% contribution of the compensation to the employees. For the second option, the employees need to get at least $5,000 for the given year.

People who have attained the 50 or over can also enjoy a catch-up provision and enjoy better benefits. However, compared to the other plans, the catch-up provision is $2,500.

The SIMPLE IRA plan can also be funded with a basic IRA or a 401(k) plan. One also cannot change the plan into a Traditional IRA without being entitled to a wasting period. The wasting period is the period of two years from the date when the employees first took part in the plan. 

Limits:

The limit of contribution in the plan SIMPLE IRA for the year 2009 is $11,500 compared to $10,500 for the year 2008. The deferral contributions need to be deposited into the account by the 30th day which follows the month for which the deferral is applied. Employees who are eligible can defer the full amount of their compensation up to the annual dollar limit by being covered under the plan.


SEP( Simplified Employee Pension plan)
SEP enables employers to make contributions toward the employees' retirement and if self-employed, to their own retirement. Contributions are made directly to your IRA set up for you (a SEP-IRA). It is best suited for small businesses with a small part-time staff, which do not have any other type of retirement plan, and are completely funding the company pension plan.

 

IRAs-Taxes

In a traditional IRA, the contributions can be tax deductible if it is not an employer sponsored plan. But, you can also have a non-deductible traditional IRA if you do not meet eligibility requirements for deduction. If it is covered by an employer-sponsored plan, deductibility is determined by your modified adjusted gross income and your tax filing status. But, there is no tax-deductible contribution for a Roth IRA. 

Is there any penalty on early withdrawal?

Yes. For a traditional IRA, there is a 10% penalty if you withdraw funds before you are 59 ½. But, the penalty is waived if withdrawals are for:

  • Higher education expenses
  • First time home purchase (up to $10,000)
  • Death or disability
  • Certain medical expenses
  • Other exceptions apply

For a Roth IRA, there is no penalty if you are withdrawing your contribution. Otherwise, the conditions are similar as in a traditional IRA.

Are there income taxes on withdrawal of earnings?

Earnings from traditional IRAs are taxable when you start taking distributions. They are not taxable in the case of a Roth IRA under the following conditions:

  • your account has been open for at least five years
  • you are 59 1/2
  • you a purchasing a home for the first time (limited up to $10,000) in case of any disability or your death 

Are there income taxes on withdrawal of contributions?

If your contributions towards your traditional IRA were tax deductible then you will be taxed during withdrawal. However if you have a Roth IRA then you can withdraw contributions anytime without any penalty.

Last Updated: 08/09/11