Traditional Individual Retirement Arrangements (IRA) & Roth IRAs

Learn the basics about these popular tax-deferred retirement accounts.

Retirement savings plans are tax-deferred to increase financial security once a taxpayer is no longer working. It provides taxpayers with the dual benefit of saving money on taxes and increasing their savings. A major disadvantage of an IRA is that any early withdrawal of funds attracts stiff penalties.

Traditional and Roth IRA Contribution Limits

Individual Retirement Arrangements (IRAs) have various qualifying factors and restrictions, and not all IRA contributions are tax-deductible. For 2013, the maximum contribution taxpayers can make to either their traditional or Roth IRA is less than $5,500 or the taxable compensation for the year. For those taxpayers who are 50 years old or older, the maximum contribution limit is $6,500. This limitation does not apply to rollover contributions.

Contribution limits can change every year, so taxpayers are advised to check the IRS website for each year's contribution limits. For Roth IRAs, taxpayers should also consider their filing status and income, as it affects their contribution limit.

Taxpayers who have other retirement plans through their employer or business can make contributions to their IRAs, but it will not be tax-deductible. In case of joint filing, if neither spouse is making contributions to other retirement plans from work, all the contributions are tax deductible. A spouse can make a contribution to IRA even if only the other one has taxable compensation.

Regular contributions to traditional IRAs can only be made until a taxpayer reaches 70 � years of age. Irregular contributions and rollover contributions can be made at any age to traditional or Roth IRAs.

Special Roth IRA Rules

Traditional IRAs and Roth IRAs share most rules, but Roth IRAs are subject to some special rules including:

  • Contributions to a Roth IRA are not deductible.
  • Qualified distributions are tax-free if all requirements are met.
  • Contributions to Roth IRAs can be made after 70 � years of age.
  • The account or annuity needs to be designated as a Roth IRA when it is set-up.

Taxpayers must also consider their filing status and income to see the maximum amount of contributions they can make to their Roth IRAs.

How to Set up an IRA

Taxpayers can set up an IRA with the following:

  • Bank or other financial institution
  • Life insurance company
  • Mutual fund
  • Stockbroker

Contributions made to traditional IRAs are generally not taxed until distributed. Contributions can be made any time of the year, but withdrawals should only be made after taxpayers have reached 70 � years of age if penalties need to be avoided.

If excess contributions have been made, taxpayers may withdraw the excess contributions before the due date of filing their tax returns, along with any income earned on the excess contribution.

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