Making The IRA Contribution Limits Work For You
An individual retirement account (or IRA) is a personal savings plan for individuals saving up for retirement. It is different from regular savings plans in that it has income tax advantages. You invest money in an IRA up to the amounts allowable in the tax law. These maximum limits change depending on the year. This investment in IRA is called an IRA contribution and the limits are called IRA contribution limits.
Whatever earnings this contribution accumulates (i.e., earnings directly derived from the contribution as well as earnings derived from these earning, and so on and so forth) is free from any taxes. Taxes are only levied when a withdrawal (also called Distribution) is made from the IRA. The IRA contribution itself is income tax deductible, subject to certain conditions.
The IRA contribution limits per year on the traditional IRA has moved up from $3,000 per year for the years 2002-2004, $4,000 per year from 2005-2006, and $5,000 per year from 2007-2008. From 2009 to 2010, the IRA contribution limits per year will be indexed against inflation. For those 50 and above, there are supplemental allowances that can considerably increase this limit so as to afford a “catch up” viz. the younger contributors and enjoy sizeable benefits when retirement comes.
The rationale behind setting IRA contribution limits is to be able to control the potential abuse of the IRA. Without these limits, the IRA could easily become a tax shelter for those seeking to avoid paying the government the appropriate amount of income tax, which was clearly not what the IRA was set up for in the first place. The IRA was set up in order to encourage “forced savings” for future retirement purposes for the average American by providing tax-based incentives. Imagine what would happen if the billionaires made huge contributions if there were no IRA contribution limits! Their earnings would not be taxed and the government will lose opportunities from uncollectible taxes! Despite these controls, there are ways to maximize your benefits from IRA. For example, consider the spousal IRA, which allow a married person to make a self directed IRA contribution for his/her spouse. Since each has its own IRA contribution limits, it is possible to make twice the maximum contribution amounts. If you have kids, each one can have his/her own IRA if it can be proven that they are gainfully employed, even if it is through your own business. Again, since each have their own IRA contribution limits; you can take advantage of this by either complementing (or completely covering) the allowed IRA contribution limits. Of course, by doing so, it would mean that in the event that your children eventually get really gainfully employed, your “virtual” limit gets reduced, unless your children decide not to involve themselves actively in the IRA. These are just a few examples of how you can manage IRA contribution limits. The IRA is a good plan because of the objective that it wishes to achieve: an ensured future during retirement. This plan, however, needs to be managed well lest it fall victim to abuse. As a major control, therefore setting IRA contribution limits have been placed so that those who will really need it can benefit from it, those who do not really need will not be given the opportunity to abuse it, and the government can continue to raise its needed revenues through taxation.
Ira Contribution
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