Regular IRAs and Roth IRAs
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The plain-vanilla type of IRA is a regular IRA. Regular IRAs are also called traditional IRAs. Roth IRAs were introduced in 1998. For 2013, you are allowed to contribute up to $5,500 to your IRA. If you have more than one account, you may contribute to all of them, as long as the total contributed is not greater than the yearly limit.
As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, you can make larger contributions to a regular or Roth IRA beginning in 2003. A catch-up provision allows workers who turn age 50 to make even larger contributions.
The following table shows individual contribution limits for regular (and Roth) IRAs. Since 2009, the limits have been indexed to inflation in increments of $500:
Yearly individual contribution limits (2004-2013):
Contributions to regular IRAs are tax-deductible, subject to income limits and your (or a spouse's) participation in an employer-sponsored retirement plan. The earnings on an IRA grow tax-deferred, which means you don't owe income taxes until you begin to take distributions from the account.
You can begin to take penalty-free distributions from a regular (or Roth) IRA after you reach age 59-1/2. In most cases, you must pay an early-withdrawal penalty if you take a distribution sooner. Regular IRAs require that you begin to take distributions when you reach age 70-1/2. The amount you are required to take each year is called your required minimum distribution (RMD). To calculate your required minimum distribution, see Appendix C of IRS Pub. 590: "Individual Retirement Arrangements."
Nondeductible contributions to regular IRAs
If you earn too much income, or already participate in a 401(k) or similar retirement plan, your tax-deductible contributions to a regular IRA are gradually phased out. This means that some of your contributions to a regular IRA cannot be deducted from your income. The contributions that are not tax-deductible are called nondeductible contributions. Here are the income limits at which your tax-deductible contributions phase out:
To help you calculate a nondeductible contribution, see the worksheet for a reduced IRA deduction in IRS Pub. 590. You will also have to complete IRS Form 8606 to ensure that you don't pay income taxes later on the amount of contributions on which you've already paid taxes.
You can contribute up to $5,500 to a Roth IRA for 2013. The same catch-up provision allows persons age 50 or older to contribute up to $6,500 to a Roth IRA or combination of accounts.
A big difference in regular IRAs and Roth IRAs is that your contributions to a Roth IRA are not tax-deductible. Instead, your contributions are made after paying income taxes. This disadvantage would seem to favor regular IRAs. However, if you keep a Roth IRA for at least five years and have reached age 59-1/2, become disabled, die, or incur allowable expenses related to a first-time home purchase, the entire amount is exempt from income tax and IRS penalties.
At higher incomes, allowable contributions to a Roth IRA phase out altogether:
To calculate a partial contribution:
The following tables show allowable partial contributions to a Roth IRA for 2013:
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
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