Individual retirement account

There are general requirements in establishing an individual retirement account. First you must be an employee or a self-employed individual who is not participating in a qualified pension, profit sharing, or stock bonus plan of an employer. Therefore, if you are employed by a corporation (or a non-corporate entity) and that organization maintains a retirement plan under which you are covered, you are excluded from... 

Once it has been established that you may set up an individual retirement account, you must consider the maximum amount of contributions which can be made under this type of plan. The contribution limitations are 1500 or 15% of your earned income, whichever is less. For these type of plans, earned income is defined as wages, salaries, professional fees, and self-employment income. It does not, however, include earnings from property, such as interest, dividends, or rents. These latter types of earnings are considered passive income and cannot be considered in calculating the amount of contribution which may be made. 

Once an individual has established these plans, distribution provisions under these plans are restricted to the time at which they may commence. Distributions from an individual retirement account may not begin before an individual reaches age 59%. If distributions are made prior to that age, they are subject to a 10% premature distributions penalty in addition to being included in the individual s taxable income for that year. Furthermore, distributions may not be postponed beyond the taxable year in which the individual attains age 70%. So, in other words, between age 59% and 70% distributions may commence. Once distributions do occur, any amounts received under the plan are taxed as ordinary income includable in the individual s gross income for that year and are taxed at ordinary rates—no capital gains or special averaging is permitted. 

The maximum contributions under a Keough Plan are substantially higher than under an individual retirement account. The contribution limitations are the lesser of 15% of earned income or 7500. Earned income for contribution purposes does not include wages, salaries, dividends, or interest. Earned income includes only net earnings from self-employment. 

In order for the contributions to be deductible, payments for both cash and accrual basis taxpayer may be made no later than the due date of the income tax return. If a contribution is made in excess of the 15% or 7500 limitations, the excess is subject to a yearly 6% excise tax penalty until such excess contribution is fully utilized. Distributions under a Keogh Plan may not commence before an individual reaches age 59%, except for reasons of disability or death. Like the individual retirement account, distributions must commence no later than the taxable year in which the individual attains age 70%. 

Designation of Beneficiary. Life insurance proceeds, U.S. savings bonds, and balances in employer retirement plans, Individual Retirement Accounts, or Keogh accounts pass directly to named beneficiaries. The asset is not subject to probate but is included in the estate for tax purposes. Also, bank accounts can have a pay-on-death person named to receive the proceeds of the accounts after your death. 

Check the beneficiary designations you have on file for your life insurance, employer retirement plan, Individual Retirement Account, or Keogh plan. Be sure the current designations are consistent with your wishes. 

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