Retirement Plan Payments Killer Explanation And Detailed Guidelines
Retirement Plan Payments Tax Deductions Explained.
If you have self-employment income and you decide to set up a retirement plan, you can get a tax deduction for the contributions you make to your retirement plan.The above the line deduction for your retirement plan payments may reduce your income tax. Generally, the retirement funds are not taxed until post-retirement distribution.Employers who provide their employees with retirement benefits can deduct the contributions they made on their tax return.If you plan to have sufficient retirement funds, you may consider setting up a Keogh plan, an individual 401(k) plan or an Individual Retirement Plan.
Eligibility For An IRA Plan
You are eligible for an individual retirement account if you or your spouse is employed, self-employed, or covered by a corporate pension plan. Certain limits apply, if you decide to have an IRA in addition to a Keogh plan.
Contributions To An IRA Plan, KEOGH Plan Or Simplified Pension Plan
If you set up an IRA plan, you can make contributions of as much as a 100 percent of compensation, up to a normal limit of $5000 per year, tax deductible.There is a special situation, when you are allowed to contribute $12,000 to your retirement plan. Your wife is unemployed, both of you are 50 years old or over and your modified adjusted gross income is $109,000.
The contribution limits for this retirement plan are 25% of earned income or the maximum amount of $49,000 per year.
Simplified Pension Plan
This plan allows individuals to make contributions to their retirement income. The contribution limit is 25% of earned income or $49,000.If you are the owner of a business and you choose for a KEOGH plan or a Simplified Pension Plan, you must make contributions for other employees as well. The good news is that these contributions are deductible. If you are an employer and you decide to set up an IRA plan, you do not have to set up a similar plan for your employees.
IRA Plan Contributions
If you are eligible for an IRA plan, you can contribute no more than $5,000 to your unemployed spouse’s retirement plan. In this way, the IRS allows you to provide retirement income for your non-employed spouse. In case of divorce, your former spouse is entitled to keep her share of the money.You can make contributions to your IRA plan from your wages, salaries or professional fees and other amounts received for personal services, commissions on insurance, tips, bonuses, etc.All contributions must be made in cash.The distribution of your retirement funds commence after attaining 6 months over the age of 70.If you receive payment from an IRA plan, before attaining 6 months over the age of 59, or before you become disabled, the payment will be consider a premature distribution. It will be included in your gross income. In addition, you have to pay income taxes for the amount equal to 10% of the premature distribution for that year.For more detailed information on tax deduction for the IRA contributions, contact us at 713 774 4467!
Premature Distribution Rules
Early withdrawals and early distributions are other names for premature distributions.If you receive premature distributions, you have to pay an additional 10 percent of that amount on your income tax.There are few exceptions. The additional tax of 10% of the premature distribution does not apply for:
- Those individuals who served in military, including the Reserve and National Guard for at least 180 days after September 11, 2001.
- Certain unemployed individuals who pay health insurance premiums. In order to qualify, they must receive unemployment benefits for at least 12 consecutive weeks
- Certain medical expenses
- Qualified first time home buyer ($10,000 lifetime limitation, beginning with January 2008)
- Qualified higher education expenses
- IRS Levy on IRA
The premature distributions mentioned above are still subject to income tax, except the amounts withdrawn from a Roth IRA, which are usually free of tax.