While the IRS's sole purpose is to provide revenue for the federal government by taxing everything we do, a few rules have been enacted that actually encourage savine for retirement. Many employers have retirement plans, but the smart investor plans ahead by taking on this responsibility themselves. Individual retirement acounts are a great way to do this, and they come in three types. They include the traditional IRA, the Roth IRA, and the self-employed or SEP IRA. A bi part of properly using these account for your retirement planning is to understand the contribution limits for each type of account.
Distinguishing Between Traditional, ROTH and SEP IRA. Each of these IRA has its own characteristic but the differences are based on contribution limits, age requirements, distribution plans, and income caps.
Traditional IRA
The limit stands at an amount equal to your taxable compensation up to $5,000 if you are 50 years or younger. However, there is a catch up provision which allows anyone over 50 years to contribute $6,000 to invest more as one nears retirement. It is important to note the contributions would be tax deductible if neither you nor your spouse contributes to a retirement plan at work. If you have workplace retirement plan, the deductions are reduced according to your income and tax filings. For people who do not file as a couple, deductions are reduced if your modified adjusted gross income (MAGI) is from $58,000 to $68,000. For a couple filing together, deductions apply if your MAGI range is from $92,000 up to $112,000. There are also deductions if you do not have a qualified workplace retirement account and for couples filing jointly deductions apply if your MAGI range is from $173,000 to $183,000. For married people who decide to file separately, they can only take a deduction if their income stands at $10,000 or less.
Roth IRA
This plan is designed for individuals whose income is based upon a salary. The main advantage of a Roth IRA is considerable tax break if your income meets certain criteria. Roth IRA 2012 contribution limits max out at $5,000 for any individual aged 50 or less. For those above the age of 50, an additional $1,000 contribution is permitted, again as a 'catch up'. You can have both a traditional IRA and Roth IRA, but the $5,000 limit applies to both accounts. This account was created as a result of the Taxpayer Relief Act of 1997. Individuals making above $125,000 are unable to contribute, and couples with a combined income above $183,000 are ineligible for these accounts. When married but filing separately, you are able to contribute when your income surpasses $10,000.
SEP IRA
A savings Incentive Match Plan for Employees is meant for anyone in business or self employed whose salary comes in form of a W-2. The limits stand at $11,500 for those below 50 years and $14,000 if you are 50 years and above. However, IRS also indicates that the maximum contribution has to be 25% or less of an employee's salary. It is easy to set and operate unlike other IRA plans.
These accounts are all designed to help you shelter your income from taxation in one form or another. This enables you to start saving faster and more effectively for your retirement.
Distinguishing Between Traditional, ROTH and SEP IRA. Each of these IRA has its own characteristic but the differences are based on contribution limits, age requirements, distribution plans, and income caps.
Traditional IRA
The limit stands at an amount equal to your taxable compensation up to $5,000 if you are 50 years or younger. However, there is a catch up provision which allows anyone over 50 years to contribute $6,000 to invest more as one nears retirement. It is important to note the contributions would be tax deductible if neither you nor your spouse contributes to a retirement plan at work. If you have workplace retirement plan, the deductions are reduced according to your income and tax filings. For people who do not file as a couple, deductions are reduced if your modified adjusted gross income (MAGI) is from $58,000 to $68,000. For a couple filing together, deductions apply if your MAGI range is from $92,000 up to $112,000. There are also deductions if you do not have a qualified workplace retirement account and for couples filing jointly deductions apply if your MAGI range is from $173,000 to $183,000. For married people who decide to file separately, they can only take a deduction if their income stands at $10,000 or less.
Roth IRA
This plan is designed for individuals whose income is based upon a salary. The main advantage of a Roth IRA is considerable tax break if your income meets certain criteria. Roth IRA 2012 contribution limits max out at $5,000 for any individual aged 50 or less. For those above the age of 50, an additional $1,000 contribution is permitted, again as a 'catch up'. You can have both a traditional IRA and Roth IRA, but the $5,000 limit applies to both accounts. This account was created as a result of the Taxpayer Relief Act of 1997. Individuals making above $125,000 are unable to contribute, and couples with a combined income above $183,000 are ineligible for these accounts. When married but filing separately, you are able to contribute when your income surpasses $10,000.
SEP IRA
A savings Incentive Match Plan for Employees is meant for anyone in business or self employed whose salary comes in form of a W-2. The limits stand at $11,500 for those below 50 years and $14,000 if you are 50 years and above. However, IRS also indicates that the maximum contribution has to be 25% or less of an employee's salary. It is easy to set and operate unlike other IRA plans.
These accounts are all designed to help you shelter your income from taxation in one form or another. This enables you to start saving faster and more effectively for your retirement.
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Want to know more about 2012 IRA contribution limits, go to www.2012iracontributionlimits.org. Click here to visit the site.
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