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What's New for 2011
Modified
AGI limit for traditional IRA contributions
increased. For 2011, if you are covered by a
retirement plan at work, your deduction for
contributions to a traditional IRA is reduced (phased
out) if your modified AGI is:
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More than $90,000 but less than $110,000 for a
married couple filing a joint return or a
qualifying widow(er),
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More than $56,000 but less than $66,000 for a
single individual or head of household, or
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Less than $10,000 for a married individual filing
a separate return.
If you either live with your spouse or
file a joint return, and your spouse is covered by a
retirement plan at work, but you are not, your deduction
is phased out if your modified AGI is more than $169,000
but less than $179,000. If your modified AGI is $179,000
or more, you cannot take a deduction for contributions
to a traditional IRA.
This chapter
discusses the original IRA. In this publication the
original IRA (sometimes called an ordinary or regular
IRA) is referred to as a “traditional
IRA.” A traditional IRA is any IRA that is
not a Roth IRA or a SIMPLE IRA. The following are two
advantages of a traditional IRA:
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You may be able to deduct some or all of your
contributions to it, depending on your
circumstances.
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Generally, amounts in your IRA, including
earnings and gains, are not taxed until they are
distributed.
Who
Can Open a Traditional IRA?
You can open and make contributions to a traditional
IRA if:
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You (or, if you file a joint return, your
spouse) received taxable compensation during the
year, and
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You were not age 70½ by the end of the
year.
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An Individual retirement account allows
Americans to enjoy substantial tax benefits
on retirement savings. A variety of
financial institutions offer IRAs, from
neighborhood credit unions to national banks
and brokerages.
Consumers can sign up for IRAs online or in
person, sometimes with small initial
deposits.
Accountholders can make deposits, also known
as "contributions," until they reach
retirement age. Many employers can deduct
IRA contributions directly from paychecks.
In other cases, accountholders can simply
write a check or make an online transfer
from a bank account to an IRA. Most IRAs can
also facilitate automatic withdrawals to
make investing even more convenient.
Upon reaching retirement age, accountholders
can begin to make withdrawals, called
"distributions," from their accounts. In
fact, government rules mandate that account
holders begin receiving distributions
regularly once they reach a predetermined
age. Taking distributions before the
government's threshold age can trigger
significant taxes, penalties and other
forfeits.
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IRAs appeal to many Americans because of
their tax advantages. Investors can choose
different types of IRAs, depending on the
source of their income and predictions about
potential future taxes.
A traditional IRA offers tremendous
incentives to small business owners, solo
professionals and other working adults with
federal tax obligations. In a traditional
IRA, account holders contribute a portion of
their pre-tax earnings. Account holders can
then enjoy a tax deduction on their next
federal income tax return, up to a limit set
by lawmakers. Many Americans can offset tax
burdens by contributing to IRAs, since
distributions are taxed upon withdrawal at
then-current rates.
Some Americans anticipate taxes on IRA
distributions to grow over the coming
decades. Others project their incomes to
increase toward retirement, making it more
attractive to pay tax on today's earnings at
today's rates. Therefore, a Roth
IRA
offers consumers the ability to make
contributions using after-tax dollars. At
retirement age, account holders can receive
distributions tax-free. To qualify for a
Roth IRA, prospective investors must meet
strict salary guidelines set by the
government. According to many financial
advisers, most Americans can enjoy more tax
savings over the long term by investing in a
Roth IRA instead of a traditional IRA.
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Because Individual Retirement Accounts can
be offered by almost any kind of bank or
brokerage, a consumer can choose the type of
investment vehicle that best fits her
personal risk strategy. For instance, a
young American may prefer to invest in
aggressive stocks and mutual funds. With
earnings charts that look like roller
coasters, these equities can potentially
earn a far greater return over three or four
decades than more conservative investments.
On the other hand, a consumer nearing
retirement age may elect to invest in more
stable index funds, real estate trusts or
even money
market
funds. While these investments offer a lower
rate of return, they protect older Americans
from sudden market shifts that can wipe out
up to half of a portfolio in a single year.
Although few financial advisers recommend
suffering the penalties of taking early
distributions, some financial institutions
allow accountholders to take out
low-interest loans with their IRAs as
collateral. This strategy can benefit
consumers holding credit cards with interest
rates higher than an IRA's rate of return.
Loans can be repaid through regular payroll
deduction or through automatic withdrawal.
As with any investment, experts recommend
consulting with a financial adviser or with
a tax attorney prior to opening any specific
account.
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