Insurance For Continuing Education – All About IRA’s

Individual retirement annuities (IRAs) which are established on an individual basis, allow wage earners to make independent contributions to their own retirement plans. IRAs provide a limited tax deduction for the individual’s contribution as well as interest accumulation on a tax-deferred basis (Instruments other than annuities may be used to establish individual retirement accounts, but our discussion is limited to annuities used for this purpose).

Originally, the purpose of an IRA was to offer retirement savings incentives to people not included in a corporate or employer-sponsored plan. This is still the primary use for an IRA, but some people who are covered by employer plans may establish tax-deductible IRAs as well. Because Congress tinkers with IRAs every few years, the regulations and limitations change from time to time. The purpose of this discussion is to better understand annuities, therefore the following applications of annuities into retirement plans emphasize the position and applicability of the annuities only. However, when annuity premiums are deductible in such a case, it is because of the annuity’s inclusion in the plan rather than the fact that it is, indeed, an annuity.

ELIGIBILITY AND MAXIMUM CONTRIBUTION

IRAs are available to every wage earner who is under 70½ years old; after age 70½, individuals may not establish an IRA. Each wage earner is limited to an annual contribution of $2,000 or 100% of earnings, whichever is less. For example, an individual earning a total of $1,500 annually may contribute no more than 100% or $1,500 per year to an IRA. Someone who earns $2,001 or more per year may contribute only the $2,000 maximum rather than 100% of earnings. In addition, the wage earner may make an additional contribution on behalf of a non-employed spouse, in which case the wage earner may contribute up to $4,000 a year or 100% of earnings. The maximum age for participating in an IRA is 70 ½, at which age there must be withdrawals which are specified in the government regulations and which can be taken in a lump sum or spread out over a number of years.

IS IT DEDUCTIBLE?

As indicated, any wage earner who contributes to an IRA receives the benefit of earning interest without paying taxes on the earnings until the funds are withdrawn.

Wage earners who are not included in an employer-sponsored qualified retirement plan may deduct the entire amount of the contribution from taxable income for the year the contribution is made. Wage earners who do participate in a qualified retirement plan at their place of employment are also eligible to take a tax deduction for the amount contributed provided they meet Internal Revenue Service guidelines.

A popular use for an individual annuity is as a rollover IRA to receive money from a company-sponsored pension or profit sharing plan. Individuals who leave an employer take with them any such monies in which they are fully vested-which means they own all of their share of the plan. To protect themselves from adverse tax consequences, they must have the funds immediately reinvested in another tax-favored plan. A rollover IRA provides this protection.

At one time, individuals could have possession of such funds for 60 days before rolling the funds into another plan. However, a federal law now states that to avoid all penalties, the corporate plan proceeds must be paid from the former employer’s plan directly into another instrument. If the individual chooses to have a check made payable to him or herself while deciding where to re-invest the money, the employer is required by law to withhold 20% and send it to the government.

The individual still will not be required to pay any taxes if the money is rolled over within 60 days, but there’s a huge hitch in this plan. The individual must roll over the entire amount, which includes the 20% that has been sent to the government. Therefore, the individual must find that 20% somewhere else, add it to the funds actually received, and. roll all of that into the rollover instrument. Not only does the individual get only part of the funds, but if the person cannot pay the additional 20% to make up the entire amount, the 20% already sent to the government is taxed as current income-even though the individual never had access to it.

However, the 20% previously sent to the IRS will be reclaimed on the individual’s tax return, but meanwhile the government has had temporary use of the individual’s money and has also forced the person either to find another 20% to complete the rollover or to pay taxes on money the individual never had because the government took it. A bill has been introduced to repeal this highly unfair law that penalizes anyone who is ill-informed, but as of this writing, the rule applies.