When To Start IRA Withdrawals

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. 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 IRA withdrawals (also called Distribution) are made from the IRA. The IRA Contribution itself is Income Tax deductible, subject to certain conditions.

The IRA was designed by the government in such a way as to encourage retirement savings and discourage premature IRA withdrawals. There are built in penalties when IRA withdrawals are made too early. Since every IRA contribution makes money for you, tax-free, it is to your advantage from a short-term as well as long-term perspective to let that contribution stay in the facility for as long as possible. It is also to your advantage to make as large an IRA contribution as possibly allowed by the law if these finances are part of your surplus.

The maximum IRA contribution 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 maximum IRA Contribution 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.

So, how much of the IRA Contribution is tax-deductible? All of it? That would depend on the IRA and your personal circumstance, income-wise. Focusing on the Traditional IRA, it would really depend mostly on the amount of taxable compensation earned in the tax year for consideration and whether you, or your spouse (if married) is an active IRA participant. On the assumption that your (or you and your spouse), when both incomes are combined, earned more in taxable compensation than the maximum deductible amount for the your IRA Contribution, and you (or you and your spouse) are not an active IRA participant, you should be qualified to deduct the full amount of your contribution up to the maximum deductible amount. However, if the reverse conditions are both true, then the tax-deductibility of your IRA Contribution may be reduced depending on your Gross Annual Income. It is best for you to seek expert opinion on this as well as other issues with regard to your IRA in general. At the end of the day, the government will still extract its “pound of flesh”. However, if you are well guided, this pound of flesh may legally be reduced.

It is always best to save up for retirement. After all, you will never know what the future will bring you. The individual retirement account is your best option for this objective, especially if you are not a financial or retirement planning expert. The tax shelter that this facility provides makes deciding to go with the IRA and make that IRA Contribution the soundest decision you can make for your future.

It is a good thing that the law itself has placed a preventive remedy for early IRA withdrawals. This makes sure that the money you placed in your IRA account will be put to good use when you need it the most.

Ira Contribution