Basic Information on IRAs
U.S. taxpayers can save money for retirement by investing in individual retirement arrangements (IRAs). You can contribute to IRAs on an annual basis, and all contributions are tax-deferred, which means you do not pay income tax on funds held in the account until you actually make withdrawals. Tax deferral enables your funds to grow more quickly than if they were in a non-taxable account.
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Earnings
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In order to make an annual contribution to an IRA, you must have taxable income. If you are married but do not work, however, your working spouse can make an IRA contribution on your behalf. Contributions are made on either a pre-tax or after-tax basis. You can deposit a portion of your wages pre-tax into a Traditional IRA, but you also can deposit a portion of your already taxed earnings into a Roth IRA. Once invested, funds in both types of IRA grow tax-deferred.
Income
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The Internal Revenue Service (IRS) only allows taxpayers with income below certain levels to invest in IRAs. As of early 2011, you cannot invest any funds in a Traditional IRA if you file taxes as an individual and have an adjusted gross income (AGI) of more than $66,000. If you are married and file your taxes jointly, you cannot contribute unless you have an AGI below $109,000. You cannot contribute to a Roth IRA if you file jointly and have an AGI in excess of $177,000 or file as an individual and have an AGI above $120,000.
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Contributions
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As of early 2011, you can contribute up to $5,000 per year into both a Roth and a Traditional IRA. If you are past the age of 50 years, you can contribute up to $6,000 in both types of IRA. People with income levels close to the income limits can make only partial contributions.
You can invest your IRAs in mutual funds, stocks, bonds, certificates of deposit, annuities and most other kinds of instruments.
SIMPLE IRAs
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Generally, IRAs are self-funded, which means you decide what to invest and whether to invest. Small business owners with no more than 100 employees, however, can establish IRAs on behalf of their employees. These plans, called Savings Incentive Match Plan for Employees (SIMPLE IRAs), are funded with employer contributions rather than employee contributions. If your employer starts a SIMPLE IRA on your behalf, though, you can elect to invest some of your wages in the account along with your employer's contribution. SIMPLE IRAs, like Traditional IRAs, are funded on a pre-tax basis.
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