Planning For Retirement With IRA's

Retirement plans benefit from special tax advantages but also are subject to special restrictions. For instance, there are rules that allow tax breaks for contributing to retirement plans and rules that allow retirement plan income to grow on a tax-deferred basis, but there also are rules that limit annual contributions and rules that dictate the timing and amount of distributions you take from those plans.

IRAs are very popular because they are so easy to setup and also easy to maintain. A person does not need employer approval to open an IRA and you can contribute as much as you want to the account, as long as you do not exceed the annual limits). Below are the three main types of IRAs.

Traditional IRA Options. IRA assets grow tax deferred, meaning that you owe no tax on the earnings until you withdraw funds.

The amount that you can contribute is dependent on statutory limits, your age, and your earned income. The maximum you can contribute is equal to your earned income. Earned income is income from wages and self-employment. Investment income is not considered earned income. There is also a catch-up provision for those that are 50 years old or older. This provision allows you to make larger contributions than normal. Additionally, your spouse can use some of your income to contribute to his or her account. However, if you have reached age 70 at the end of the year of your contribution then you are no longer allowed to make contributions.

Before you decide to start with a traditional IRA, it is wise to consider your other options. These options include a Roth IRA and an employer's 401(k) plan.

Contribution deductibility is one factor that often times leads an indication to switch the type of IRA that they use. Your income level is an important indicator as to whether you will be able to deduct all of your contributions. If you and your spouse are able to participate in an employer-sponsored plan, then you will definitely be able to deduct your contributions. However, these deductions might not be worth anything if your adjusted gross income (AGI) is too high.

For those that are not able to make a deduction contribution, making a nondeductible contribution is a viable option. You will still be able to enjoy tax-deferred growth on your retirement account. Additionally, if you wait until you are age 59 you can withdraw your funds and only be taxed on earnings.

Roth IRA. You are able to contribute the same amount to a Roth IRA as you are able to contribute to a traditional IRA. The real difference between the two is their eligibility rules, such as the lack of an age limit with respect to contributions. This disregard for the age limit is only applicable if you meet the earned income requirement.

There are people who have money and people who are rich.

You also must remember that the total annual contributions to your IRA may never exceed the defined limit. In order to get around these limits you are able to split your contribution between a traditional and Roth IRA.

If you decide to go with a Roth IRA you will have to remember than you are not allowed to claim a deduction. However, you are allowed to withdraw all of your IRA earnings free of tax after you reach the age of 59. You will have to have your account for 5 years to do this.

Traditional IRAs also have required minimum distribution rules that must be followed, Roth IRAs do not have such restrictions.

If a Roth IRA sounds like a better place to park your retirement funds but you already have a traditional IRA, you may be able to elect to convert some or all of it to a Roth IRA. In so doing, you'll be creating taxable income, but you'll also be getting the benefit of future tax-free withdrawals.

Simplified Employee Pension (SEP) IRA. A SEP IRA provides self-employed individuals a way to make more significant retirement contributions than would be available to them through a traditional or Roth IRA. Funds are treated, for tax purposes, the same as IRA funds; you may claim a deduction for your contributions, and distributions will be taxed. But the contribution limits can be much higher.