|
 IRA Rules are something that we've covered before for some specific types of IRAs, but we've never put them all together in one place before. So in this addition we are going to talk about some general IRA rules including eligibility, contributions, and withdrawals. And where necessary, we are going to point you in the right direction for additional information.
SIMPLE, Traditional, and Roth IRA Rules
We've decided on the format below because there are three types of Individual Retirement Accounts that you may be able to choose from: traditional IRAs, Roth IRAs, or SIMPLE IRAs. The IRS has established slightly different rules for each of these retirement offerings and this article will help you to understand some of the differences between these IRA rules. If you need more information, just click on one of the article links appearing in the resources box.
IRA Eligibility Rules
When we talk about IRA eligibility, we're really only talking about who qualifies to make a contribution to an IRA. Most of the qualification rules are pretty straightforward, and later on we'll discuss the answer to - How much can I contribute to an IRA? That answer is not so straightforward.
Traditional IRA Eligibility
In general, there are two eligibility rules that apply to traditional IRAs. The first rule is that you must be under age 70 1/2 at the end of the calendar year. The second rule states that you must have some form of compensation to contribute to a traditional IRA. Compensation can take the form of wages, salaries, bonuses, and commissions.
Roth IRA Eligibility
The eligibility / qualifying rules for a Roth IRA are less stringent versus a traditional IRA. To contribute to a Roth all you need is some form of compensation. There is no age limit or restriction for a Roth IRA.
SIMPLE IRA Eligibility
To participate in a SIMPLE IRA, your employer must first offer the plan to its employees - so these first set of rules actually apply to your employer. The first is that the employer must have 100 or less employees that received $5,000 or more in compensation in the prior year. The second rule is that the employer cannot offer another qualified plan - such as a 401k plan. So a SIMPLE IRA is a retirement solution for small businesses.
There is really only one rule that applies to employees wishing to participate in their employer's SIMPLE IRA plan - they must have received at least $5,000 in compensation in the past two years, and they are expected to be paid at least $5,000 in the current year.
IRA Contribution Limit Rules
The contribution limits appearing in this section help to answer the question - What is the maximum amount that can be contributed to an IRA? This does not necessarily mean that an individual can contribute this much money each year. To answer that question, we're going to discuss later on the income limits for IRAs.
Traditional IRA Contributions
The IRS has spelled out two sets of rules when it comes to the maximum contributions that can be made to a traditional IRA. The first is the "standard" contribution limits. In 2006 and 2007, the standard contribution limit for a traditional IRA is $4,000. In 2008, the standard contribution for a traditional IRA increases to $5,000.
In addition to the standard contribution, there is also a catch-up contribution limit. If you've reached age 50 or older in the calendar year, then you are eligible for an additional catch-up contribution of 1,000 in 2006 and 2007. This means your total contribution in the years 2006 and 2007 is $4,000 + $1,000 or $5,000. In 2008, the catch-up contribution remains at $1,000; however because of the increase to the standard contribution those ages 50 and older can contribute $5,000 + $1,000 or $6,000.
In the years 2009 and beyond, these limits will be increased with an index of inflation.
Roth IRA Contributions
The maximum contribution limit rules for Roth IRAs are exactly the same as those for traditional IRAs. In 2006 and 2007, the standard contribution maximum to a Roth IRA is $4,000. In 2008, the contribution limit moves up to $5,000.
If you reach age 50 or older in a calendar year, then you're entitled to take a catch up contribution. In the years 2006 through 2008 the catch up contribution limit is $1,000. However, because the standard contributions are different in 2006 and 2007, you can contribute up to $4,000 + $1,000 or $5,000, while in 2008 you can contribute up to $5,000 + $1,000 or $6,000.
SIMPLE IRA Contributions
Employees participating in a SIMPLE IRA plan can defer up to $10,500 in 2007 and 2008. Catch-up contributions for those 50 and older are $2,500 in 2007 and 2008. The standard deferral contribution limits are expected to grow with the cost of living in 2008 and will apply to the 2009 values.
For more information on this topic, take a look at our detailed article on IRA Contribution Limits.
IRA Income Limit and Tax Deductibility Rules
This is where the IRS rules for each IRA type get a little more complex. With all three types of IRAs there are income limits for contributions. If you exceed the income limit, which is based on your adjusted gross income or AGI, then you are not eligible to participate, or your eligibility to make a full contribution is phased-out.
In fact, there are even phase-out limits that apply just to the tax deductibility of a traditional IRA. So at this point, it is best to point you to more detailed articles that discuss eligibility, contributions and income limits:
- Traditional IRA - here you will find detailed information and tables outlining income limits, deductibility, and phase-out information for each IRS tax-filing status.
- Roth IRA Rules - in addition to the above information, this article also discusses transfer and IRA distribution rules.
- SIMPLE IRA - besides the eligibility and contribution rules already discussed, SIMPLE IRAs need to address portability of the account. Just like a 401k plan, there are rules that the IRS has spelled-out concerning SIMPLE IRA rollovers.
IRA Distribution / Withdrawal Rules
For the most part, investors and retirement planners use the terms withdrawals and distributions interchangeably. Whether you like to call it an IRA withdrawal or distribution doesn't matter, what we are going to discuss in the following sections are the rules by which you can take money out of your IRA. And the possible tax penalties that apply if you don't follow these withdrawal rules.
Traditional IRA Withdrawals
With a traditional IRA we have what is sometimes called the age 59 1/2 rule. This rule simply means that you have to wait until you're age 59 1/2 until you can make a withdrawal from your IRA account without incurring a 10% additional tax penalty.
Traditional IRAs also have minimum distribution (MDR) rules that begin starting at age 70 1/2. The concept behind minimum required distributions or MDRs is quite simple. By using a life expectancy table, you calculate how much to withdraw from your account each year such that the balance in the IRA account would be zero when you reach your life expectancy age.
Roth IRA Withdrawals
You can start to make what is called a qualified distribution after the 5 taxable year period beginning with the first year for which a contribution was made to a Roth IRA. You need to reach age 59 1/2 to make a qualified distribution. You can also make a withdrawal if you become disabled, or plan to use the money as a first time home buyer.
Roth IRAs are not subject to the minimum required distribution rule.
SIMPLE IRA Withdrawals
In general, SIMPLE IRAs follow the same exact withdrawal rules that apply to traditional IRAs - including exceptions. But there is a rule that is called the "2-year period" rule that is unique to SIMPLE IRAs.
The 2-year period begins on the date on which the employee first participated in any SIMPLE IRA plan maintained by their employer. Technically, this is the first day on which a contribution is made by your employer and deposited into your SIMPLE IRA fund.
If an employee takes an early distribution within this 2-year period, then the additional tax penalty is raised from 10% to 25%. However, if one of the exceptions mentioned earlier applies to these early withdrawals, then the 25% tax penalty is not imposed.
For more detailed information on this topic, see our detailed article entitled IRA Withdrawals.
About the Author - IRA Rules
Copyright © 2005 - 2007 Money-Zine.com
Retirement Resources on the Web |
Home 
