Individual Retirement Account (IRA). An IRA is a retirement product, which is set-up by individuals to accumulate tax-deferred savings. IRAs can be established by the individual who opens the account, by a non-working spouse, or for a minor with earned income.

IRA assets have the opportunity to grow tax-deferred until the participant makes withdrawals. That means the participant earns income on their principal, income on their income, and income on the income that would otherwise go toward paying taxes.

Eligibility:

In order to open and contribute to an IRA, the following criteria must be met. The participant must:

• Receive earned income (or be a qualifying non-working spouse).
• Possess a valid Social Security number.
• Be less than 70 ½ years old at the end of the tax year in which the contribution is made.

IRA account holders can make annual contributions to their plans in order to increase the amount of savings in preparation for their retirement. These contributions can be 100% of the participant's earned income up to a maximum of $5000 per year (for 2008). Individuals may open several IRAs for themselves but the cumulative annual contribution to all IRAs cannot exceed $5000.

An individual can also contribute to an IRA for his or her non-income-earning spouse. Generally, an individual can contribute earned income up to a maximum of $10,000 per year to both accounts combined (the client's and spouse's accounts) as long as no more than $5000 is contributed to either account in any given tax year. For example, Mr. and Mrs. Doe each have an IRA. Mrs. Doe does not work outside the home and does not earn income. Mr. Doe would like to contribute the maximum $10,000 to their IRA accounts. He can contribute a maximum of $5000 of earned income to each account.

• Any account owner over the age of 50 qualifies for a "catch up" contribution and is permitted to contribute a maximum of $6000 per year (for 2008). Individuals over the age of 50 may have several IRAs for themselves but the cumulative annual contribution to all IRAs cannot exceed $6000. Generally, an individual over age 50 can contribute earned income up to a maximum of $12,000 per year to both accounts combined (the client's and spouse's accounts) as long as the spouse is also over age 50 and no more than $6000 is contributed to either IRA in any given tax year.

The traditional IRA offers an incentive to certain qualifying participants to encourage requirement savings. For qualifying participant's, contributions to the IRA may be tax deductible. In this way, participants can make contributions to their IRA accounts and reduce their taxable income at the same time. As explained in the Introduction section, the contributions are not taxed until the participant withdraws them.

In order to provide this tax benefit to participants who open IRAs, the Internal Revenue Code allows a tax deduction on some IRA contributions. Deductibility of the contributions is based upon the combination of a number of factors: the participants' income, their tax filing status (i.e. single, married filing separately, married filing jointly), and their participation in an employer sponsored retirement plan.

The first criteria for deducting contributions to an IRA is whether the participant is covered by an employer sponsored plan. If the answer is no, the participant's contribution may be fully deductible on his or her federal income taxes for the year in which the contribution occurred. If the participant is covered by an employer's plan, then the factors listed previously must be used to determine the amount of the contribution which is deductible. It is important for you to recognize that by taking advantage of eligibility for deductions, you may gain additional tax benefits of investing in an IRA.

Post-tax:

This type of contribution allows the participant to deposit money that has already been taxed by the federal and state governments into their IRA. Because participants have already paid tax on the income, they will pay tax only on any gains, including the dividends and interest earned on the principal when they withdraw funds from their retirement plan.

Because IRA contributions are post-tax dollars, the participants may need another incentive to open these accounts.

Distribution Guidelines:

IRAs, like all retirement plan accounts, are designed to encourage participants to set aside money for their retirement years. Consequently, there are penalties for early withdrawal of retirement funds. The earliest age that participants may remove funds from their IRAs without incurring a penalty is at age 59 ½. Withdrawals made prior to age 59 ½ are called premature distributions and are subject to taxes and a 10% penalty.

There are exceptions to the penalty tax on early withdrawals including: death, disability, qualified higher education expenses, qualified acquisition cost of a first home, or annuitizing the account. Annuitizing an account means the funds are distributed over five years in equal amounts or until the participant turns 59 ½, whichever comes first.

IRAs also stipulate the age at which mandatory distributions take place. IRA participants must begin taking distributions when they reach age 70 ½. There are tax penalties for not taking a mandatory distribution, and also penalties for not taking the minimum mandatory distribution.