| Top 10 Tips about IRA Contributions
(August 28th, 2009)
 Saving
towards your retirement in a self-managed Individual Retirement
Account (IRA) is a big responsibility and it is important you are
made aware of common pitfalls, penalties, and problems that could
arise in your career as a self-IRA manager. In this article, we
will tell you the top 10 things you should know about your IRA.
i) Contributions made to a traditional
IRA are made on a pre-tax basis. This means you can get
an instant deduction on your income tax return by contributing to
an IRA. For instance, if you earn $6,500 a month gross wage and
contribute 15% of this to your employer sponsored 401(k) plan, this
totals $975. You would then subtract this $975 from your original
gross wage ($6,500 - $975) = $5,525 to arrive at your gross taxable
income, which is $5,525 in this case.
ii) Contributions can be made to
your traditional IRA at any time during the year and by the tax
deadline in the following year (April 15th). For instance
to make IRA contributions for the year 2009, you can do so at any
time between January 1st, 2009 and April 15, 2010, which is the
tax filing deadline.
iii) The amount of funds in your
traditional IRA are not taxed until you withdraw them upon retirement,
this is why you make contributions on a pre-tax basis as explained
in point i.
iv) For the year 2009, the maximum
contribution to a traditional IRA is $5000 for people under
50 years, and $6000 for people over 50 years of age.
v) Use IRS
Form 8880 - Credit for Qualified Retirement Savings Contributions,
to determine if you can get a credit on your IRA contributions,
also known as Saver’s tax credit.
vi) To contribute to a traditional
IRA, you must be 70 and ½ years or less.
vii) To contribute to a traditional
IRA, you must have compensation income which includes employee
wages & salaries, social security benefits, tips, commissions
& bonuses, advance EIC payments and Medicare wages & tips.
viii) Any distributions taken from
a traditional IRA before age 59 and 1/2 will be subject
to income taxes & 10% early withdrawal penalty.
ix) Types of income that are not
eligible as compensation income for contributions to a traditional
IRA include annuity or pension incomes, income from interest
& dividends, deferred wages, rental income from real estate
investments & properties and business partnership income.
x) Visit IRS
Publication 590 – Individual Retirement Accounts (IRA)
for much more comprehensive information regarding IRAs
and retirement accounts.
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