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OLT TAX CORNER ~ Individual Retirement Accounts
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 What is the difference between a Traditional IRA and a Roth IRA? |
| The essential difference, is that with Traditional IRA's, your contributions are deductible. With Roth IRA's, you are not allowed any deduction for contributions made to the IRA. However, all Traditional IRA distributions are taxable, whereas qualified distributions from a Roth IRA are nontaxable. |
| An Individual Retirement Arrangement (IRA) is the most basic sort of retirement arrangement. There are two types of IRAs. |
| Traditional IRA - A traditional IRA is a personal savings plan that gives you tax advantages for saving for retirement. Contributions to a traditional IRA may be tax deductible--either in whole or in part. Also, the earnings on the amounts in your IRA are not taxed until they are distributed. The portion of the contribution that is tax deductible is not taxed until distributed. A traditional IRA can be established at many different financial institutions, including banks, insurance companies and brokerage firms. |
| Roth IRA - A Roth IRA is also a personal savings plan but operates somewhat in reverse compared to a Traditional IRA. For instance, contributions to a Roth IRA are not tax deductible while contributions to a Traditional IRA may be deductible. However, while distributions (including earnings) from a Traditional IRA may be included in income, the distributions (including earnings) from a Roth IRA are not included in income. For both IRA types--Traditional and Roth--earnings that remain in the account are not taxed. A Roth IRA can be established at the same types of financial institutions as a Traditional IRA. |
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| I made contributions to an IRA throughout the year. Are any of these contributions deductible? |
| For 2023, IRA contributions cannot exceed the lesser of $6,500 or compensation received for rendering personal services. For taxpayers age 50 or older, the limit increases to the lesser of $7,500 or compensation received. |
| Compensation includes: |
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| Compensation does NOT include: |
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| Generally, you can deduct the lesser of either what you contribute to your Traditional IRA, or the general limit regarding how much can be contributed. You can figure your deduction using the worksheets in the instructions for Form 1040. |
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| I am self-employed. I was thinking about opening a SEP IRA. What qualifications must be met, and what kind of deductions could I take for contributions made to this plan? |
| Anyone with self-employment income can qualify for a SEP IRA. Contributions are treated the same as an IRA. A maximum of 25% of net self-employment income after the self-employment tax deduction up to a maximum of $55,000 can be contributed. There is a 10% penalty on any early distribution, which would be any withdrawal before the age of 59½. Age withdrawals must begin at age 70½. However, contributions can still be made to the plan after age 70½ if there is still earned income. There are no annual contributions required. Borrowing is not permitted. A lump sum does not qualify for averaging (ten-year averaging is only available to participants born before 1936). These funds can be rolled over if you choose to do so. The contributions made to this plan are generally tax deductible by the contributor. Contributions plus earnings are tax deferred until withdrawn. |
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| I was thinking of starting a SIMPLE IRA. Are there any requirements for opening this type of plan? Can any deductions be taken? |
| Employers with 100 or fewer employees (including self-employed individuals) that do not currently maintain another retirement plan would qualify for a SIMPLE IRA. The plan must be offered to all employees who have earned at least $5,000 in any prior two years, and are reasonably expected to earn at least $5,000 in the current year. |
| The rules regarding maximum contributions are as follows: employee elective deferrals are limited to $12,500 ($15,500 if 50 or older). The employer can either match dollar for dollar employee elective deferrals up to 3% of employee wages, can be reduced to as low as 1% in any two out of five years, or contribute 2% of each eligible employee's compensation for all employees (including non-participants). |
| The early withdrawal penalty (10% of the distribution) applies to anyone under the age of 59½ unless an exception applies. SIMPLE IRA distributions will incur a 25% additional tax instead of 10% if made within the first 2 years of participation. Age withdrawals must begin at age 70½, however contributions can still be made to the plan after age 70½ if there is still earned income. Annual distributions are required. No borrowing is permitted. A lump sum does not qualify for averaging (ten-year averaging is only available to participants born before 1936). There is a 10% penalty for excess contributions. Contributions are generally tax deductible by the contributor. Contributions plus earnings are tax deferred until withdrawn. |
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| I withdrew some money from my 401k plan this year. Do I have to pay any additional tax on these funds? |
| There is a 10% penalty tax for any early withdrawal from a qualified retirement plan. It is considered an early withdrawal if the recipient of the distribution is younger than 59½. |
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