Everyone saves for the rainy day, our parents taught us to save money from a youngage so that it is of some use at a later stage. Even the taxman says that.
IRA, or Individual Retirement Arrangement, is a personal savings plan that lets you save up for rainy days and gives you tax benefits in the form of tax deductions. All contributions made to this plan are entitled to the IRA tax deduction. This also includes earnings from these contributions unless they are distributed to you.
2 basic rules govern the working of IRA.
The first is the simple IRA. The more traditional way which helps for that long retirement plan. Contributions to IRA are exempted unless you receive any kind of distribution.
Setting up an IRA is very simple, you need to be less than 70.5 years of age before you can apply. A taxable income is necessary to avail this. Only salaries, commissions, alimony, maintenance or any other means of income
Generated by self constitutes this. Rental or any other income from property, annuity or deferred compensation does not qualify as taxable compensation.
The maximum you can contribute to your IRA is either $ 3,000 or your taxable compensation for the year, whichever is less. It goes to $3500 if you are 50 or older. If you are uncovered, you can claim the complete deductions. If, however, you are covered by a valid retirement plan, your IRA deduction can either be reduced or eliminated, depending on the amount of your Modified Adjusted Gross Income and your filing status.
If in case you have made any withdrawals, then you have to pay tax on the amounts available. And it is wholly taxable.
Roth IRA – Roth IRA is the reverse of the traditional IRA. Contributions that you make to this RA will get you no deductions. No taxes on withdrawals or earnings. Everything else about Roth IRA is like the simple IRA. Like the latter it can be either an account or an annuity. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up.
These two basic rules now sum up what you want to know about taxes and especially the savings aspect. Just make the most out of them,
Find more about Tax Deductions