Individual Retirement Accounts

The two most popular retirement accounts are traditional and Roth IRA's. An employee may have a traditional IRA even if covered by an employer-sponsored retirement plan. Contributions to IRA's are limited to the lesser: a.)the participants compensation b.) statutory limits. Contributions cannot be made in a year the participants has reached age 70 1/2 or for any later year. Contributions can be $5,000 for individuals under age 50, and $6,000 for age 50 and older.

A traditional IRA contribution is deductible from income and distributions are taxed. A Roth IRA is subject to the same rules a traditional but the contributions are not deductible, yet the distributions are tax free. For younger taxpayers, Roth investment accumulations may provide a more advantageous way to reel in substantial non-taxed capital gains.

IRA investments can be made in mutual funds, brokerage companies, life insurance companies and other financial institutions. An IRA cannot invest invest in collectibles such as artwork, gems or stamps.

An excess contributions occurs when a taxparers contributes an amount that exceeds the statutory or participant compensation amounts. A 6% penalty applies each year the excess remains in the account. Form 5329 is used to calculate and pay the penalty.

A Simplified Employee Pension is a, IRA for businesses were employees can contribute up to 25% of wages to $49,000 and Self employed individuals can contribute 20% of net SE income after one half SE tax deduction, up to $49,000.