Everyone saves for the rainy day, our parents taught us to save
money from a youngage so that it is of some use at a later
stage. Even the taxman says that.
IRA, or Individual Retirement Arrangement, is a personal savings
plan that lets you save up for rainy days and gives you tax
benefits in the form of tax deductions. All contributions made
to this plan are entitled to the IRA tax deduction. This also
includes earnings from these contributions unless they are
distributed to you.
2 basic rules govern the working of IRA.
The first is the simple IRA. The more traditional way which
helps for that long retirement plan. Contributions to IRA are
exempted unless you receive any kind of distribution.
Setting up an IRA is very simple, you need to be less than 70.5
years of age before you can apply. A taxable income is necessary
to avail this. Only salaries, commissions, alimony, maintenance
or any other means of income Generated by self constitutes this.
Rental or any other income from property, annuity or deferred
compensation does not qualify as taxable compensation.
The maximum you can contribute to your IRA is either $ 3,000 or
your taxable compensation for the year, whichever is less. It
goes to $3500 if you are 50 or older. If you are uncovered, you
can claim the complete deductions. If, however, you are covered
by a valid retirement plan, your IRA deduction can either be
reduced or eliminated, depending on the amount of your Modified
Adjusted Gross Income and your filing status.
If in case you have made any withdrawals, then you have to pay
tax on the amounts available. And it is wholly taxable.
Roth IRA - Roth IRA is the reverse of the traditional IRA.
Contributions that you make to this RA will get you no
deductions. No taxes on withdrawals or earnings. Everything else
about Roth IRA is like the simple IRA. Like the latter it can be
either an account or an annuity. To be a Roth IRA, the account
or annuity must be designated as a Roth IRA when it is set up.
These two basic rules now sum up what you want to know about
taxes and especially the savings aspect. Just make the most out
of them,
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