24. Individual Retirement Account

An Individual Retirement Account allows you to deposit funds for your retirement and deduct the contribution from your taxable income. You defer the tax paid at the higher tax brackets until your retirement.

At retirement, your taxable income should be less. More important though, the dollars you saved were compounding tax free in the account while you worked.

For tax years beginning after 1982, an individual, whether or not an active participant in a qualified employer plan or in a government plan, may contribute to an IRA and take an income tax deduction each year for the cash contribution made.

A person may contribute 100% of earned income up to $2000 each year. If your spouse is unemployed, you may deposit $2,250 in two IRA's in any manner you choose as long as the amount contributed to either IRA is not
more than $2000.

One may use a savings account, mutual fund, or an annuity as an investment vehicle. One must wait until age 59-1/2 before receiving funds from his I.R.A. and must begin to withdraw funds before age 70-1/2.

At retirement, one may request a lump sum withdrawal and pay tax on the entire amount subject to 5-year averaging, or one may purchase an annuity. The annuity payments are taxed as they are received. The selection of annuity or some type of installment payout over more than 36 months will exempt the I.R.A. proceeds from taxation in the recipient's estate (provided the beneficiary is not the estate).

If one is disabled before age 59-1/2, I.R.A. proceeds may be withdrawn without the penalty. Survivor benefits are also free from the penalty before age 59-1/2.

Tax reference verification 1-800-829-1040

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