Wednesday, February 11, 2009


Contributions -- IRA contributions are limited to $5,000 for the 2008 tax year if you're younger than 50. If you're 50 or older, you can contribute as much as $6,000 for the 2008 tax year. The limits are the same for 2009. Contributions are classified as either tax deductible or nondeductible.
Deductible or nondeductible -- Contributions to a traditional IRA are tax-deductible if you are not covered by your employer's retirement plan. Even if you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a traditional IRA depending on your income and filing status. Contributions to a Roth IRA are not deductible but future withdrawals may be tax-free.
Contributions and Withdrawals You may contribute up to $5,000 in 2008. Or, if you're 50 or older, you can put aside up to $6,000 for that tax year. But your contributions can't exceed your earned income. The investment grows tax-free until you begin making withdrawals, usually after age 59½. Take money out before then and you will usually get hit with a 10-percent penalty unless you meet certain specified requirements.
Modified adjusted gross income If you are covered by an employer’s 401K or similar plan, your contribution could be limited or completely phased out based on your modified gross income. Generally, this will be the line on your taxes that says 'adjusted gross income,' but for some people it has to be modified. Some modifiers include foreign-earned income, housing costs of U.S. citizens or residents living abroad and income from sources within Puerto Rico, Guam or American Samoa.
Required minimum distribution -- Generally, if you have a traditional IRA, you must begin taking money out of the account by April 1 of the year after you turn 70½. The amount is a minimum distribution determined by your age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to determine the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren't subject to minimum distribution requirements until after the Roth owner dies.
Rollover -- This is the term used when transferring assets from one tax-deferred retirement plan to another. It is usually best to have it transferred from one custodian to another custodian to avoid having tax withheld.
Roth IRA -- The advantage of a Roth IRA is that withdrawals are tax-free if the account has been open for at least five years and you're at least 59½ when you start to withdraw money. Contributions to a Roth are not tax-deductible. You can withdraw your contributions anytime you want, no penalty or taxes. You can also withdraw earnings for a qualifying event if the account is at least 5 years old. Qualifying events include: death or disability of the account holder and a first-home purchase.

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