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What is an IRA?
An IRA is an individual retirement arrangement. It is a personal savings plan that gives you tax advantages for setting aside money for retirement. An IRA is referred to as a traditional IRA if it is not a Roth IRA or a SIMPLE IRA. Traditional IRAs include SEP IRAs.
Traditional IRA tax advantages and rules:
• Contributions to an IRA may be fully or partially deductible.
• Amounts in your IRA (including earnings and gains) are not taxed until distributed.
• There is no limit on how much you can earn and still contribute (however, contributions are not deductible above certain amounts).
• Contributions are not allowed past age 70½ and required minimum distributions begin after age 70½.
• Early distributions (before you are age 59½) are subject to a 10% additional tax. Exceptions apply.
• Distributions are taxed as ordinary income.
Who Can Contribute to an IRA?
Any individual can set up a traditional IRA if he or she receives taxable compensation during the year and is not age 70½ by the end of the year. An individual can have a traditional IRA even if covered by an employer-sponsored retirement plan. However, the deductible amount of contributions to a traditional IRA may phased out.
Contribution limit. Contributions to IRAs are limited to the lesser of the individual’s compensation (or spouse’s compensation under a spousal IRA), or $6,000($7,000 for age 50 or older).Total contributions are combined with Roth IRA contributions to determine limits. For example, a $1,000 contribution to a Roth IRA will reduce total contributions allowable to a traditional IRA by $1,000.
Spousal IRA. If both spouses have compensation, each can set up a separate IRA. Spouses cannot participate in the same IRA. If filing status is Married Filing Jointly and one spouse’s compensation is less than the contribution limit, the lower-income spouse can use the compensation of the other spouse to qualify. However, the spousal IRA is limited to total compensation reduced by any IRA contributions.This means that the total combined contributions that can be made for the year to your IRA and your spouse’s IRA can be as much as $12,000 ($13,000 if only one of you is age 50 or older or $14,000 if both of you are age 50 or older).
70½ rule. Contributions cannot be made in a year the participant has reached age 70½ or for any later year.
When Can You Make Contributions?
Contributions to an IRA can be made at any time during the year or by the due date of your return for that year(not including extensions). This means that most people can make contributions for 2019 by April 15, 2020.
Please contact the Sarasota CPAs at Sterling Tax & Accounting for more information!