Different Types of IRAs – From Traditional To Spousal IRAs
March 2, 2010 – 9:43 pmIndividual retirement accounts are more commonly referred to as IRAs. In 1974 Congress enacted the very first version of an IRA. They were created to allow working people who did not have a pension plan sponsored by their employers, a tax advantaged way to invest in their own retirement.
This first version of the IRA allowed for $1,500 to be tax deferred until the age of 59 1/2 when it can be used by the investor. Other rules were set into place that included a 10% penalty and taxation of the invested assets for any early withdrawals. This first edition is known today as a Traditional IRA.
Traditional IRA contributions for the 2010 tax year will be $5,000 for those participants under the age of 50. For those who participate and are over 50 and under 70 1/2, the contribution limit is $6,000. All participants have until April 15th of the following tax year to contribute to their IRAs for 2010.
IRAs evolved when the late Senator William V. Roth Jr created a tax free version of the popular retirement account, called the Roth IRA. Roths allow for a tax free growth of assets invested within these individual retirement vehicles. The Roth uses after tax dollars that grow within the account free of federal and state income taxation. However. this means that there is no tax defferral as is seen in a Traditional IRA. Therefore, there is no immediate tax advantage n the form of income tax credits that can be assessed annually.
The contribution amounts of Roth IRAs are the same as Traditional IRAs. However,there is no age limit for participating. However, for those participants who reach a compensation in excess of $159,000, there is a decrease in contributions allowed. This decrease is known as a phase out and it begins between compensation levels of $159,000 to $160,000. Any Roth participant reaching these compensation levels should consult with a tax professional to determine the correct contribution amounts.
Spousal IRAs were created for the non working spouse. The only requirements for contributing spouses are that they are married, file their income taxes jointly and have a family income of at least what they invest into the IRA. All contributors to Traditional Spousal IRAs must be under the age of 70 1/2. All Traditional IRA owners must take a required minimum distribution (RMD) the April after they turn 70. This means that some money must be taken from the IRA in the form of a withdrawal in which the traditional federal and state income taxes are paid.
Spousal Roths have no age limit, but there are rules regarding income and the amount of participation in a Roth IRA that is allowed. These rules mainly include the phase out for incomes between $159,000-$169,000 in compensation.
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