The only requirement to open and contribute to a traditional IRA is that you must have taxable compensation and be under age 70-and-a-half. So as we steam into the 2013 tax season let’s look at the history of the IRA and some guidelines that may help our clients better prepare for the future while managing their assets and income today.
What is an IRA?
Established by the Federal Government, an IRA is an Individual Retirement Account. It is a method to encourage retirement savings.
Timeline of IRAs
1974 Introduced with enactment of the Employee Retirement Income Security Act (ERISA).
- Initial program restricted IRAs to workers not covered by a qualified employment-based retirement plan.
- Maximum contribution was $1,500.
1981 Economic Recovery Tax Act allowed all taxpayers under the age of 70-and-a-half to contribute to an IRA, regardless of their coverage under a qualified plan.
- Maximum annual contribution rose to $2,000.
- Allowed participants to contribute $250 on behalf of a non-working spouse.
1986 The Tax Reform Act of 1986 reversed the trend toward expanded participation by phasing out the deduction for IRA contributions among higher-earning workers who are covered by an employment-based retirement plan themselves or who have a covered spouse.
1996 Small Business Job Protection Act 1996 raised the limit on contributions on behalf of non-working spouses from $250 to $2,000.
1997 Taxpayer Relief Act of 1997 created Roth IRAs. Purpose was to encourage retirement savings.
2001 Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) raised limits on contributions beginning in 2002 and allowed “catch-up” contributions by people ages 50 and above.
2006 Congress makes it easier for high-income taxpayers to contribute to Roth IRAs.
Types of IRAs
Contributions are often tax-deductible. All transactions and earnings within the IRA have no tax impact and withdrawals at retirement are taxed as income.
Contributions are made with after-tax assets. All transactions within the IRA have no tax impact, and withdrawals are usually tax free.
SEP – Simplified Employee Pension – is a provision that allows an employer to make retirement plan contributions into a Traditional IRA established in the employee’s name, instead of to a pension fund account in the company’s name.
SIMPLE IRA – Savings Incentive Match Plan for Employees IRA– is a simplified employee pension plan that allows both employer and employee contributions, similar to a 401(k) plan, but with lower contribution limits and simpler administration.
Traditional vs. Roth IRA
For a spouse who does not participate in an employer-sponsored plan, contributions to a Traditional IRA are:
- Fully deductible for married couples with modified adjusted gross income (MAGI) of $173,000 or less for tax year 2012 and $178,000 or less for tax year 2013.
- Partially deductible for married couples with a MAGI of more than $173,000 and less than $183,000 for tax year 2012 and more than $178,000 and less than $188,000 for tax year 2013.
Married couples with a MAGI of $183,000 and above for tax year 2012 and $188,000 and above for tax year 2013 may still make, but not deduct, contributions to a Traditional IRA.
Spousal Contributions to Roth IRA
Contributions to a Roth IRA are never tax-deductible; however, contributions and any earnings can potentially grow tax-free for retirement. In order to contribute to a Roth IRA for yourself or your spouse, married couples must have a MAGI of less than $183,000 for tax year 2012 and less than $188,000 for tax year 2013.