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What You Need to Know About IRAs and Tax Benefits

It’s amazing how fast time seems to be passing. As we approach the end of the year, we begin to think about taxes and how to minimize them. One of the best ways to defer taxes on income is to invest in Individual Retirement Accounts (IRAs). There are four (4) different IRAs. Each of them offers different tax benefits. Here’s a brief summary of what you need to know.

The Traditional IRA

The traditional IRA has a number of noteworthy features.

* Your yearly  tax deductible contributions are based on the level of your income.

* Because the contributions are paid with pre-tax dollars, your taxes owed are reduced each pay period.

* Many employers will match your contribution, equally, or up to a certain percentage. Over time, this tax-free  money can be very significant.

* You won’t have to pay taxes on this money until it is withdrawn from you IRA. You may begin withdrawals at age 59.5 and MUST begin withdrawals by age 70.5.

* If you are under 70.5 years-old, and you are earning income you can contribute up to the maximum annual limit to an IRA. The limit typically varies from year to year. The limit depends on the age of the person making the contribution. If you are “older”, you are permitted a higher percentage of contribution to “top up” your IRA.

* If you withdraw funds from an IRA before age 59.5 you will be subject to taxes as well as a 10% penalty, unless you claim an exception to the rule. Exceptions are few, but they include purchasing your first home, disability and  high medical expenses.

* You may convert a traditional IRA to a Roth IRA if you pay income tax on the IRA distribution before you roll it over to a Roth IRA. You will not suffer tax penalties for taking a distribution from a ROTH IRA.

The Roth IRA. The ROTH is more limited that the traditional IRA.

* If you contribute to a Roth IRA, your contributions are not tax deductible, however, this may depend on income level.

* You are not required to take a distribution at age 70.5, so you can hold onto your money in longer.

* Every single penny you earn, as well as principal in a Roth are 100% tax free as long as you follow all the IRS rules and regulations. You can stay  up to date at the IRS website

* There are no annual limits on contributions, as detailed here:

* You can withdraw your principal at any time without a penalty as long as it has been in the account for five years, or longer.

* You pay no tax on the distributions you take.

The SEP IRA. If you are self employed, this may be best suite for you.

A Simplified Employee Plan (SEP) IRA is a retirement plan that an employer sets up to benefit its employees. The employees may make tax-deductible contributions,that will be deposited to a traditional IRA. Employers decide how much they will contribute to a SEP each year, within certain percentage and dollar limits. The percentage must remain the same for each employee annually.

The SEP IRA is perfect for self-employed individuals or small business owners. You can open a SEP IRA for any type of business structure, including a sole proprietorship, a corporation or a partnership up to a maximum of 100 employees. For plan purposes, the business owner In the case of a sole proprietorship, is considered the employee.

With a  SEP IRA, there are specific age and work history limitations. Since a business’s income could be unpredictable, the employer can choose whether it will make a contribution or not make a contribution. All contributions to a SEP IRA are tax-deductible.

The “SIMPLE” IRA, really is very simple.

SIMPLE is an acronym for “Savings Incentive Match Plan for Employees”. It is similar to a SEP, but in the case,  employees can make tax-deductible contributions as well as receive matching contributions from their employer. However, there is a maximum annual limit to the contributions, just as in the case of a traditional IRA.

I hope this information helps you to limit your tax liability from now on, and make your future financially sound. Here’s to your fiscal health.

J Thomas Smith is host of “Sunday Morning Live” on “The People’s Station” KMJQ/Majic 102.1 (9-11 cst). He is an attorney, author, keynote speaker and mental health consultant. Your comments are welcome at

Happy african woman proud of her savings growth.

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