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| Tax School Homepage |
| Individual Retirement Arrangements (IRAs) |
| A traditional IRA is a way to save for retirement that gives you tax advantages. An IRA is one of the few legal tax shelters available to taxpayers. It is a tax-favored personal savings arrangement, which allows you to set aside money for retirement. The original IRA is often referred to as a "traditional IRA." You may be eligible for a tax credit equal to a percentage of your contribution. Amounts in your IRA, including earnings from the IRA, are generally not taxed until distributed to you. |
| There are many common misconceptions about IRAs. First, many think that to contribute to a traditional IRA, you must be over 70 1/2 at the end of the year. This of course it not true. Another misconception is that if you are married both you and your spouse when filing a MFJ tax return, must have taxable compensation in order to contribute to an IRA. You and your spouse can each make IRA contributions even if only one of you has taxable compensation. You can make a contribution on behalf of your spouse and it does not even matter is she did not work or if she earned any compensation for the year. |
| Distributions from a traditional IRA are fully or partially taxable in the year of distribution. If you made only deductible contributions, your distributions are fully taxable. These IRA distributions are subject to a 10% additional tax if they were made prior to age 59 1/2. |
| Roth IRA Contributions |
| A Roth IRA is an IRA very similar to a traditional IRA with a few exceptions. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. Amongst other things, you cannot deduct contributions to a Roth IRA but if you satisfy the requirements, qualified distributions can be tax-free. In addition, you can leave amounts in your Roth IRA as long as you live. Contrary to traditional IRAs, you can continue to make contributions to a Roth IRA even after you reach age 70 1/2. |
| A Roth IRA is a tax favored account or annuity set up in the United States solely for your benefit or the benefit of your beneficiaries. You can contribute to a Roth IRA if you have taxable compensation and your modified AGI is within certain limits. Additionally, you may be able to roll over amounts from a qualified retirement plan to a Roth IRA. Furthermore, a Roth IRA differs from a traditional IRA in that contributions are not deductible and qualified distributions are not included in income. Regardless of the amount of your AGI, you may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. |
| Pensions and Annuities |
| The pension or annuity payments that you receive are fully taxable if you have no investment in the contract because you did not contribute anything or are not considered to have contributed anything for the pension or annuity. Since your employer did not withhold contributions from your salary and you received all of your contributions tax free in prior years is another reason the payments are fully taxable. |
| Furthermore, if you receive pension or annuity payments before age 59 1/2, you may be subject to an additional 10% on early distributions unless the distribution was made as part of a series of substantially equal periodic payments from a qualified plan that begins after your separation from service. They could also be subject to the additional 10% on early distributions unless the distribution was made because you were totally and permanently disabled or made on or after the death of the plan participant or contract holder. The distribution would also not be subject to the penalty if made from a qualified retirement plan after your separation from service and made in or after the year you reached age 55. |
| If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable. Additionally, if you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. Furthermore, if you receive pension or annuity payments before age 59½, you may be subject to an additional 10% tax on early distributions unless the distribution qualifies for an exception. All in all, the taxable portion of your pension or annuity payment is generally subject to federal income tax withholding. |
| Withholding from periodic payments of a pension or annuity is generally figured the same way as for salaries and wages. If you do not submit the withholding certificate, the payer must withhold tax as if you were married and claiming three withholding allowances. In regards to pension and annuities distribution, if you pay your taxes through withholdings and not enough is withheld, you may also need to make estimated tax payments to ensure your taxes are not underpaid. |
| If some contributions to your pensions and annuity plan were previously included in income, part of the distributions from the arrangement will be excluded from income and you must figure the tax-free portion at the start of payments. The tax-free part of the contributions to your pension or annuity plan generally remains the same each year, even if the amount of the payment changes. However, the total amount of your pension or annuity that you can exclude from income is generally limited to your total cost. |
| Copyright © 2014 [Hera's Income Tax School]. All Annual Filing Season Program rights reserved. |
| Revised: 12/14/14 |
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