Individual Retirement Plans
Traditional IRAs - Individual Retirement Accounts
MR. WATSON: Anybody, at any age, who has earned income may contribute to an IRA, ($6500 for 2023). They may also set up & contribute the same for a non-wage earning spouse, called a Spousal IRA. . Folks over age 50 can contribute "catch-up" amounts. They may or may not be able to deduct this amount. The ability to deduct rests on two factors:
- Whether or not he is covered by an employer sponsored retirement plan
- The amount of income he makes.
MR. WATSON: If he has no retirement plan at work, then the amount he contributes he can deduct. Example: If Michael Jordan made $100 million dollars and had no employer-sponsored plan, he could contribute $6500, and therefore deduct $6500. If he had an employer-sponsored plan he could still contribute $6500 but not deduct any. If you have no retirement plan at work you can contribute and deduct $6500 no matter how much income you make.
MR. WATSON: But if you have an employer-sponsored retirement plan at work, your ability to deduct will depend upon how much income you earned. (The following are examples only. No need to know these numbers, simply an example). For example: $73,001-$83,000 for a single guy is the limit (an example only). Earning less than $73,000 he could still deduct the entire contribution. If he has an employer sponsored retirement plan and he makes between $73,001 & $83,000, he can still contribute $6500 but his ability to deduct is curtailed. If he earns above $83,000 he can deduct nothing. (Married filing jointly the limits are $116,000-$136,000). Don't confuse the ability to contribute with the ability to deduct.
MR. WATSON: You must start taking money out by the year following the year you turn 72. Stiff penalty if you don't. If you take money out before 59 1/2 you will pay an income tax and a 10% penalty on the amount you took out. Exceptions to avoid the 10% penalty are as follows:
- If the owner dies or becomes disabled,
- Qualifying medical expenses,
- Higher education,
- First time home buyers (up to $10,000),
- Health insurance premiums while unemployed or,
- Distribution is taken in equal payments over the owner's lifetime,
- To correct or reduce an excess contribution
ROTH IRA
MR. WATSON: ROTH IRA's. With a Roth IRA, an individual can contribute ($6500 in 2023) but not deduct it. All the money when taken out will be tax free, unlike the traditional IRA where the earnings will be taxed. There is also no age limit of 72 for mandatory withdrawals. You can contribute even if you have a plan at work (the maximum contribution limits apply collectively to both plans). At any age, an individual with earned income, can contribute to a ROTH IRA. There is no mandatory distribution at age 72 but there are income limits. These income limits are about $218,000 for joint income earners and $138,000 for single tax payers, these are examples only, they change every year, no need to know the limits for the exam. If a worker makes more than these limits he can't contribute. The money must be held in the account for at least five years and the owner must be over 59 1/2 to start taking withdrawals without taxation. These would be called "qualified withdrawals." If the money is taken out without meeting these two requirements the earnings will be subjected to tax, (called a non-qualified Roth withdrawal). But, listen up. If a guy has put in $25,000, and that amount has grown to $40,000, the gain will be $15,000. Only the gain will be taxed and penalized if the dude takes the money before he is supposed to, called a non-qualified withdraw. Plus, unlike a traditional IRA, he never has to take the money. Not required.
MR. WATSON: Spousal IRA A non-working spouse may contribute the same amount as a working spouse. It must be reported on a couple's joint income tax return.
MR. WATSON: Rollover IRA's When an individual leaves one employer for another they may roll over their IRA if reinvested within 60 days. The difference between a transfer and a rollover is this: A transfer goes from fiduciary to fiduciary and a rollover is when they send the money to you.
MR. WATSON: Only the person who establishes an IRA is eligible for the rollover with one exception and that is a surviving spouse. She can take the money when the spouse who owned the IRA dies and delay receiving it to avoid immediate taxation. New tax law allows for non-spousal beneficiaries to take IRA proceeds over their lifetimes, plus the lifetimes of their oldest beneficiary.
