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Individual retirement arrangements (IRAs).

There are two types of regular individual retirement arrangements, individual retirement accounts and individual retirement annuities. Each is often referred to as an "IRA" (see also pages 324-325, 524 and 557). Generally an individual retirement account is set up as a trust or custodial account with a bank, a federally insured credit union, or a savings and loan association, whereas an individual retirement annuity is established by purchasing an annuity contract from a life insurance company. Life insurance may not be purchased by the IRA.

Contributions may be made up to the time when the individual's tax return is due (excluding extensions). In order to deduct contributions an individual must: (1) have compensation (including earned income as an employee or self-employed person, or alimony); and (2) not have attained age 70V during the taxable year for which the contribution is made.

In 2010 a deduction may be taken for amounts contributed up to the lesser of $5,000 or 100 percent of compensation includable in gross income. An additional "catch-up" contribution of $1,000 is allowed in 2010 for individuals who attain age 50 before the close of the taxable year. Deductions may be reduced or eliminated if the individual is an "active participant" in a qualified plan. The phase-out range for a married couple filing jointly is between $167,000 and $177,000 for a spouse who is not an active participant and between $89,000 and $109,000 for a spouse who is an active participant. The phase-out range for a single individual who is an active participant is between $56,000 and $66,000. Similar deductions may be taken for contributions to the IRA of a lesser-compensated spouse.

Generally, funds accumulated in a plan are not taxable until they are actually distributed. However, amounts distributed prior to age 59V are considered early distributions and are subject to a 10-percent-penalty tax. Exceptions to the penalty tax include distributions: (1) made on or after death; (2) attributable to disability; (3) which are part of a series of substantially equal periodic payments made (at least annually) for the life or life expectancy of the individual or the joint lives or joint life expectancy of the individual and a designated beneficiary (e.g., an annuity payout); (4) for medical expenses in excess of 7.5 percent of adjusted gross income; (5) for health insurance premiums for those receiving unemployment compensation; (6) to pay for a first home; or (7) to pay for qualified higher education expenses. Distributions from a plan must usually begin by April 1 of the year after the year in which the individual reaches age 70 1/2.

In order to prevent current taxation IRAs are frequently used for "rollovers" of distributions from qualified plans, 403(b) plans, or eligible 457 government plans. An IRA that meets certain requirements may accept an expanded rate of contribution as a simplified employee pension (SEP). SEPs are discussed on page 542.

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Title Annotation:Terms & Concepts
Publication:Field Guide to Estate, Employee, & Business Planning
Date:Jan 1, 2010
Previous Article:Individual 401(k) plan.
Next Article:Installment sale.

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