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Investing 101
Regular IRA
A Regular IRA, (Individual Retirement Account) is the workhorse of retirement accounts. I call it the workhorse since it is often the final resting place for most employer-based roll-overs. Then of course, it's also available for those folks who are not fortunate enough to have an employer-based plan for their own self-funded retirement plan. Almost all my clients have at least one regular IRA.
The Regular IRA pre-dates the Roth IRA and was authorized by Congress in the early 70's. I can distinctly remember my dad telling me to put away $1,500 pre-tax when I started my first real job at the Pantry Pride grocery store. At the time $1,500 might as well have been $150,000 but looking back now I wish I had put the money into the IRA instead of that new 78 Camaro.
Today's contribution limits are $5,000 per year of earned income and $6,000 if you're 50 years of age or over. These are the upper limits--amounts less than that are allowed and are better than nothing. The contribution must be from or covered by active income, i.e., from a job, not passive income like rents or investments.
And like most things concerning taxation, there are income limits. You may be excluded from deducting your IRA contribution if you make too much money. The key is if you or your spouse are covered by, or have the opportunity to join an employer-based plan. Here are the phase-out deductibility income limits:
Single: $56,000 to $66,000
Married Filing Jointly: $90,000 to 110,000
Married filing jointly & spouse only is covered: $169,000 to $179,000
Single or Married-if nobody has an employer based plan then income is unlimited.
Other rules and regulations include a 10% penalty for premature distributions made before age 59.5. (See the list of seven ways to avoid the 10% penalty below.) Also, something called Required Minimum Distributions (RMD's) must begin at age 70.5. RMD's start small and gradually grow in percentage size as the owner gets older. Distributions count as income and are taxed as such regardless of when the money comes out--the money was put into the account pre-tax so it must get taxed on the way out.
These accounts were designed for retirement and the IRS penalizes early withdrawals by tacking on an extra 10% tax. Here are the seven ways to get money out of an IRA prematurely (pre-59.5 YOA) without being hit with an additional 10% penalty:
1. Made on or after death of the owner (not a good way to access your IRA)
2. Due to a disability
3. Through substantially equal periodic payments made for the life or life expectancy of the owner (a 72T distribution)
4. For medical expenses in excess of 7.5% of adjusted gross income
5. For health insurance premiums if the owner is collecting unemployment compensation
6. To pay for a first home (up to $10,000)
7. To pay for qualified higher education expenses of the owner or their children.
As you can see, for all its usefulness the Regular IRA has quite a few regulations. If you have specific questions please give me a call--I keep a few references nearby and can usually find out the answer to any situation.
Marty
(Material in this newsletter is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however no warranty can be made as to its accuracy or completeness. All illustrations shown are hypothetical in nature and do not represent any real investments or tax situations. Actual results may vary. The S&P 500 index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly into an index.) | 
