Individual Retirement Plan

What is an individual retirement plan? An explanation of individual retirement plan

An individual retirement plan is a tax-deferred account for people that are employed and their spouses. Individual retirement accounts should not be confused with a 401k retirement account which goes through your employer.

An individual retirement plan is a personal account that you will open through a bank, a brokerage firm, insurance company or a mutual fund. There are a wide range of individual retirement plan to choose from, and most of them will be taxed until the funds are withdrawn.

Tax Law on individual retirement plan

On an individual retirement plan, the US tax law lets you contribute to your individual retirement account up to:

• $4,000 for the year 2005-2007 and up to
• $8,000 for married couples.

However, married couples must file jointly on their tax return to qualify for the higher contribution limit for individual retirement account or IRA.

When is an individual retirement plan tax deductible?

It’s important to remember that an individual retirement plan may be 100% tax deductible only if you are not covered by a work plan, such as a 401k retirement plan or a 403b retirement account. If covered by work, your individual retirement plan may only be partially tax-deductible.

The Economic Growth and Tax Relief Reconciliation Act of 2001 and its impact on individual retirement plan

The Economic Growth and Tax Relief Reconciliation Act of 2001 allows individuals to increase their contributions to individual retirement accounts in stages. This law also allows what is known as a “catch-up” retirement account contribution. But to qualify for this, you must be 50 years of age or older. What this “catch-up” retirement account contribution does is it allows you to put an extra $1,000 into your individual retirement plan each year.

The Stipulations of individual retirement plan

As with anything in life, there are stipulations, and your individual retirement plan is no different. Any money you withdraw is taxed at your ordinary tax rate. Moreover, if you withdraw funds from your investment retirement account before you reach the age of 59 1/2, it’s possible that there will be an extra 10% early withdraw penalty tax. If you have individual retirement account services, your retirement account advisor will be able to advise you of all the rules.

Typically an individual retirement plan requires that you start to withdraw the money once you hit 70 1/2. On the good side, if you were not allowed to take what you contributed as a tax-deduction while you were working, then you don’t have to pay any taxes on it when you withdraw, but you will have to pay taxes on your interest gained in your individual retirement account.

The Roth individual retirement plan or Roth IRA, however, lets you withdraw from you individual retirement plan completely tax free after age 59 1/2, as long as the Roth retirement account as been active for at least 5 years. And the Roth retirement account does not require that you start withdrawing at the age of 70 1/2, instead, if you want, you can keep investing into the account as long as you have some type of earned income that you claim at the end of the year.