Individual
Retirement Arrangement
An
IRA, commonly called an Individual Retirement
Account, is a personal retirement savings plan
available to anyone, regardless of age, who
receives taxable compensation during the year.
For IRA contribution purposes, compensation
includes wages, salaries, fees, tips, bonuses,
commissions, taxable alimony, and separate maintenance
payments. Husbands and wives may each have an
IRA, even if one person in that marriage is
not working.
A person's annual contribution,
whether made to just one or to multiple IRAs,
is limited to the lesser of total taxable compensation
or to the normal yearly amount shown in the
following table. Persons age 50 or older may
make an additional catch-up contribution in
the amount indicated for the year concerned.
Traditional and Roth IRA Annual Contribution
Limits
| Year |
Normal
Contribution, US$ |
Catch-Up
Contribution, US$ |
| 2001 |
2,000 |
nil |
| 2002 |
3,000 |
500 |
| 2003 |
3,000 |
500 |
| 2004 |
3,000 |
500 |
| 2005 |
4,000 |
500 |
| 2006 |
4,000 |
1,000 |
| 2007 |
4,000 |
1,000 |
| 2008 |
5,000 |
1,000 |
| 2009 |
indexed* |
1,000 |
| *Normal
contribution limits will increase annually
by $500 whenever cumulative inflation
exceeds the next higher $500 increment |
There is no minimum or required IRA contribution,
and all earnings on the amounts in an IRA are
untaxed until withdrawn. In the case of the
Roth IRA, withdrawals may even be tax-free provided
certain minimum rules are met.
The Roth IRA was born on January 1, 1998 as
a result of the Taxpayer Relief Act of 1997.
The Roth IRA provides no deduction for contributions,
but instead provides a benefit that isn't available
for any other form of retirement savings: if
you meet certain requirements, all earnings
are tax free when you or your beneficiary withdraw
them. Other benefits include avoiding the early
distribution penalty on certain withdrawals,
and avoiding the need to take minimum distributions
after age 70½.
Contributions
to a Roth IRA are never tax-deductible. Contributions
to a traditional IRA may or may not be deductible
in the tax year made, depending on the owner's
income tax filing status, Adjusted Gross Income
(AGI), and eligibility to participate in a tax-qualified
retirement plan through employment. If the traditional
IRA owner participates in an employer's qualified
retirement plan on any day in the tax year,
the deductibility of contributions declines
to zero at certain levels of AGI.
It
is possible to convert a traditional IRA into
a Roth IRA, but until The Tax Reconciliation
Act of 2005 there was a limit of US$100,000
on adjusted gross income for such a conversion.
Now, for tax years after 2009, the limit will
be removed.
A conversion is treated as a taxable distribution,
but is not subject to the normal IRA 10% early
withdrawal penalty. Taxpayers who convert in
2010 can elect to recognize the conversion income
in 2010 or average it over the next two years.
Higher income taxpayers will very probably choose
to convert in 2010 on the principle that future
tax rates are not likely to go down significantly.
There
is likely to be a large revenue boost in 2010-2012
from the conversion possibility, but longer
term the revenue effects may be negative.
The provision does not cover 401(k) plans; but
it appears to be possible to convert Roth IRAs
which have themselves received the proceeds
of 401(K) plans.
