Questions Regarding IRA
An Individual Retirement Account is designed for consumers to save assets to use during retirement. The Internal Revenue Service regulates IRA contributions, transactions and distributions. Failure to follow IRS rules results in tax penalties and possibly even losing the tax-deferred status of IRA assets. Many common questions arise when starting and maintaining IRAs.
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When Can I Take Money Out?
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There is no age requirement for putting money into an IRA, which means you can establish an IRA very early in your earnings career. Knowing when you can take the money out helps you plan various budgeting strategies. The IRS allows normal distributions starting at age 59 1/2. Normal distributions don't have a 10 percent tax penalty assessed on distributions. The penalty is to discourage early distributions and having consumers take advantage of the tax-deferred growth. Even though there is a penalty, you are still allowed to take money out prior to age 59 1/2; it is, after all, your money.
How Much Can I Put In?
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When the IRA was established in 1973 by ERISA, the initial contribution limit was $1,500. Legislative changes have brought the limits up over the years with the 2011 contribution limits set at $5,000. This limit will be increased annually based on inflation adjustments or new legislative changes. On top of the $5,000, those over the age of 50 are allowed to make an additional $1,000, known as a catch-up contribution to better prepare in the last years before retirement.
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What Is the Difference with Roth?
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Consumers can purchase one of two types of IRA accounts, a traditional or a Roth IRA. Both have the same maximum contribution but are viewed differently by the IRS regarding tax benefits. Traditional IRA contributions can be deducted from your annual income with distributions added to adjusted gross income when taken out. Roth IRAs get no deduction but grow tax free as long as distributions are made after the IRA is owned for five years and the owner reaches age 59 1/2.
Do I Have to Qualify for an IRA?
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You do need to fall within income limits set by the IRS to make contributions into an IRA. There are phaseout ranges with traditional IRAs with full deductions below the limit and partial deductions up to the phaseout cap. Single filers not covered by an employer plan have no restrictions but have a phaseout range of $56,000 to $66,000 if covered by an employer's retirement plan. Married couples not covered by a plan have a range of $169,000 to $179,000 with a range of $90,000 to $110,000 when covered by a plan. Roth limits don't define deductions, but instead how much can be contributed. The phaseout range for single filers is $107,000 to $122,000 and $169,000 to $179,000 for married couples.
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