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What is an IRA?

An IRA is an Individual Retirement Arrangement. It is a personal savings plan that gives you tax advantages for setting aside money for retirement. An IRA is referred to as a Traditional IRA if it is not a Roth IRA or a SIMPLE IRA. Traditional IRAs include SEP IRAs.

Traditional IRA tax advantages and rules:

Contributions to an IRA may be fully or partially deductible.

Amounts in your IRA (including earnings and gains) are not taxed until they are distributed.

There is no limit on how much you can earn and still contribute. However, contributions are not deductible above certain amounts.

Contributions are not allowed past age 70½ and the holder of a Traditional IRA is required to take minimum distributions from his or her IRA in the year he or she turns age 70½.

Early distributions (before you are age 59½) are subject to a 10% additional tax. There are exceptions that apply – seek advice from a tax professional.

Distributions from Traditional IRAs are taxed as ordinary income.

Any individual can set up a Traditional IRA if he or she receives taxable compensation during the year and is not age 70½ by the end of the year. An individual can have a Traditional IRA even if the individual is covered by an employer-sponsored retirement plan. However, the deductible amount of contributions to a Traditional IRA may be decreased (See Reduced IRA Deduction, later.). Contributions to a Traditional IRA can be made at any time during the year or by the due date of your return for that year (not including extensions). This means that most people can make contributions for 2018 by April 15, 2019.

Generally, you can deduct the lesser of:

The contributions to your traditional IRA for the year, or the general limit (or spousal limit) for the year.

However, if you or your spouse is covered by an employer retirement plan, you may not be able to deduct this amount. If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be limited. Limits on the amount you can deduct do not affect the amount that can be contributed. Box 13, Form W-2, will be checked if you are covered.

Subject to whether you or your spouse was covered by an employer retirement plan, you may be entitled to only a reduced (partial) deduction or no deduction at all, depending on your modified adjusted gross income (MAGI) and filing status. MAGI for IRA purposes is your Adjusted Gross Income (AGI) from line 37, Form 1040, plus any traditional IRA deduction, student loan interest deduction, foreign earned income or housing exclusion, U.S. Savings Bond interest exclusion, employer-provided adoption benefits exclusion, domestic production activities deduction, or tuition and fees deduction.

For 2019, contributions to Traditional IRAs are limited to the lesser of the individual’s compensation (or spouse’s compensation under a spousal IRA), or $6,000 ($7,000 for age 50 or older). Total contributions are combined with Roth IRA contributions to determine limits. For example, a $1,000 contribution to a Roth IRA will reduce total contributions allowable to a Traditional IRA by $1,000. If both spouses have compensation, each can set up a separate Traditional IRA. Spouses cannot participate in the same IRA – they must have separate IRAs. If their filing status is Married Filing Jointly and one spouse’s compensation is less than the contribution limit, the lower-income spouse can use the compensation of the other spouse to qualify. However, the spousal IRA is limited to total compensation reduced by any IRA contributions. This means that the total combined contributions that can be made for the year to your IRA and your spouse’s IRA can be as much as $11,000 ($12,000 if only one of you is age 50 or older or $13,000 if both of you are age 50 or older).

The 70½ rule: Contributions cannot be made in a year the participant has reached age 70½ or for any later year. RMDs Required Minimum Distributions: An RMD is the minimum amount that you must withdraw each year upon reaching age 70½. You may withdraw more than the minimum required amount. The withdrawals will be included in taxable income except for any part that was already taxed or can be received tax free.

To find out how an IRA can change your financial plan, talk to Rukosky & Associates. Click here to setup an appointment today.

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