While the main purpose of the IRS is to provide revenue for the federal government by taxing everything we do, some policies have been put in place that actually encourage planning for retirement. Many employers have retirement packages, but the prudent individual plans ahead by taking on this responsibility themselves. IRA's are a great way to do this, and they come in three varieties. They are the traditional IRA, the Roth IRA, and the self-employed or SEP IRA. For anyone utilizing these types of accounts, understanding the contribution limits is crucial.
The traditional, Roth, and SEP IRA all have their own set of parameters, but main differences are as follows; contribution limits, age requirements, methods of distribution, and maximum income requirements.
Traditional IRA
The limit stands at an amount equal to your taxable compensation up to $5,000 if you are 50 years or younger. However, there is a catch up provision which allows anyone over 50 years to contribute $6,000 to invest more as one nears retirement. It is important to note the contributions would be tax deductible if neither you nor your spouse contributes to a retirement plan at work. If you have workplace retirement plan, the deductions are reduced according to your income and tax filings. For people who do not file as a couple, deductions are reduced if your modified adjusted gross income (MAGI) is from $58,000 to $68,000. For a couple filing together, deductions apply if your MAGI range is from $92,000 up to $112,000. There are also deductions if you do not have a qualified workplace retirement account and for couples filing jointly deductions apply if your MAGI range is from $173,000 to $183,000. For married people who decide to file separately, they can only take a deduction if their income stands at $10,000 or less.
Roth IRA
The Roth IRA plan is designed for individuals whose pay is salary based. The Roth IRA carries with it a considerable tax break if your income meets certain criteria. The contribution limits for a Roth IRA in 2012 are maxed out at $5,000 for individuals aged 50 or lower. Individuals above the age of 50 are allowed an additional $1,000 contribution for a total of $6,000 per year, allowing them to 'catch up'. It is possible to have both a traditional IRA and Roth IRA, but the $5,000 cap is spread across both accounts. The Roth retirement account was enacted as a result of the Taxpayer Relief Act of 1997. Individuals making above the $125,000 income cap are unable to contribute to a Roth IRA, and married couples filing jointly, with a combined income above $183,000 are also priced out of these accounts. When married but filing individually, you are allowed to make a contribution to the plan when your income surpasses $10,000.
SEP IRA
A savings Incentive Match Plan for Employees is meant for anyone in business or self employed whose salary comes in form of a W-2. The limits stand at $11,500 for those below 50 years and $14,000 if you are 50 years and above. However, IRS also indicates that the maximum contribution has to be 25% or less of an employee's salary. It is easy to set and operate unlike other IRA plans.
These accounts are all designed to help you shelter your income from taxation in one form or another. This enables you to start saving faster and more effectively for your retirement.
The traditional, Roth, and SEP IRA all have their own set of parameters, but main differences are as follows; contribution limits, age requirements, methods of distribution, and maximum income requirements.
Traditional IRA
The limit stands at an amount equal to your taxable compensation up to $5,000 if you are 50 years or younger. However, there is a catch up provision which allows anyone over 50 years to contribute $6,000 to invest more as one nears retirement. It is important to note the contributions would be tax deductible if neither you nor your spouse contributes to a retirement plan at work. If you have workplace retirement plan, the deductions are reduced according to your income and tax filings. For people who do not file as a couple, deductions are reduced if your modified adjusted gross income (MAGI) is from $58,000 to $68,000. For a couple filing together, deductions apply if your MAGI range is from $92,000 up to $112,000. There are also deductions if you do not have a qualified workplace retirement account and for couples filing jointly deductions apply if your MAGI range is from $173,000 to $183,000. For married people who decide to file separately, they can only take a deduction if their income stands at $10,000 or less.
Roth IRA
The Roth IRA plan is designed for individuals whose pay is salary based. The Roth IRA carries with it a considerable tax break if your income meets certain criteria. The contribution limits for a Roth IRA in 2012 are maxed out at $5,000 for individuals aged 50 or lower. Individuals above the age of 50 are allowed an additional $1,000 contribution for a total of $6,000 per year, allowing them to 'catch up'. It is possible to have both a traditional IRA and Roth IRA, but the $5,000 cap is spread across both accounts. The Roth retirement account was enacted as a result of the Taxpayer Relief Act of 1997. Individuals making above the $125,000 income cap are unable to contribute to a Roth IRA, and married couples filing jointly, with a combined income above $183,000 are also priced out of these accounts. When married but filing individually, you are allowed to make a contribution to the plan when your income surpasses $10,000.
SEP IRA
A savings Incentive Match Plan for Employees is meant for anyone in business or self employed whose salary comes in form of a W-2. The limits stand at $11,500 for those below 50 years and $14,000 if you are 50 years and above. However, IRS also indicates that the maximum contribution has to be 25% or less of an employee's salary. It is easy to set and operate unlike other IRA plans.
These accounts are all designed to help you shelter your income from taxation in one form or another. This enables you to start saving faster and more effectively for your retirement.
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Want to know more about 2012 IRA contribution limits, go to www.2012iracontributionlimits.org. Click here to visit the site.