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The Basics
of IRAs... Page 2
continued
Contributions
Anyone under age 70 1/2 who earns employment income or is married to someone who does can
contribute to an IRA. The annual limit on a contribution is $2,000 or 100% earned income,
whichever is less. So if you earned $1,000 for the year, your maximum contribution would
also be $1,000. Contributions can be made as lump-sum payments or as periodic payments
throughout the year (such as dollar-cost averaging).
As long as you have earned income, there is no minimum age for contributing to an IRA. And
with the new Roth IRA, contributions are allowed after age 70 1/2 provided you're still
employed and earning income.
What if I contribute more than my earned income or just accidentally go over the limit?
Any contributions over $2,000 are subject to a 6% penalty. You're penalized each year
until the excess is either taken out of your IRA or absorbed by a future contribution -- a
normal contribution minus the excess. Example: If you had an excess of $500 one year,
you'd only be able to contribute $1500 the following year.
For most individuals, the deadline for making an IRA contribution is April 15 for the
current tax year. 1999 contributions, for example, will be accepted from Jan 1, 1999 to
April 15, 2000 by your IRA custodian. The earlier you make your contributions, the more
time your money will have to grow in a tax-deferred (tax-free for Roth IRAs) environment.
Tax Deductions
The contributions you make to an IRA may be tax-deductible depending on such factors as
filing status, adjusted gross income, and whether you're covered by a retirement plan at
work or not. Contributions to non-deductible Traditional IRAs or Roth IRAs are never
deductible.
If you're one of the lucky few that are able to deduct contributions at tax time (and you
meet the requirements of a traditional IRA), you should consider how much you'll benefit
-- in the 28% tax bracket alone, you'll save at least $560 in taxes for a $2,000
contribution. That's money in your pocket. Money that would have otherwise gone to the
IRS.
Withdrawals
1. Traditional IRAs
Generally, you may begin withdrawing money from your Traditional IRA after age 59
1/2. Any withdrawals made earlier than this age will be subject to a 10% penalty. This
penalty is waived, however, if you're disabled, you die, you need the money for medical
bills, higher education expenses, or a first time home purchase ($10,000 max). If you
don't start the withdrawal process by age 70 1/2, you'll also be penalized for the money
you should have taken -- this is known as a "minimum withdrawal schedule".
Contributions to your Traditional IRA that are tax-deductible will be taxed on
normal withdrawal -- both contributions and earnings from your IRA will be taxed at your
highest tax bracket.
Contributions to your Traditional IRA that are non-deductible will not be taxed
on normal withdrawal -- earnings, however, will be taxed at your highest tax bracket.
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