IRA Question and Answer

· What is the difference between an Individual Retirement Account and an annuity?

The assets of an Individual Retirement Account (IRA) are held by a bank or other institution that acts as trustee or custodian, while an annuity is a contract purchased from an insurance company.

The annuity does not require a trustee or custodian because it is an insurance contract.


· How much money can one put into an IRA each year?

A taxpayer with earned income or alimony is permitted to contribute the lesser of the maximum annual contribution limit or 100% of his or her compensation, including alimony, into an IRA each year.

Annual contributions to all types of IRA plans require earned income on the part of at least one spouse.

The maximum annual contribution limit is $4,000 for taxable years 2005-2007 and $5,000 for 2008.

The maximum annual contribution limit for taxable years 2006-2010 is increased by $1,000 for those who are 50 years of age before the close of the year.


· What if my spouse does not work?

If a taxpayer files a joint return and his or her spouse has no earned income or alimony, then a total of the maximum annual contribution limit may be contributed into an IRA for the spouse as long as the combined income of both spouses each equal at least the amount of contribution.



· If I receive a distribution from my employer’s qualified plan, must I roll the money over to an IRA?

Unless rolled over, distributions are included as taxable income (except for any portion treated as a return of non-deductible contributions) and may be subjected to withholding of 20% for federal taxes. Any such income is also subject to a 10% penalty tax unless the taxpayer has attained age 59 ½, is disabled or payment is made in substantially equal installments over the course of your life (or life expectancy) or the joint lives (or life expectancies) of the person and beneficiary.


· What is the penalty for excess IRA contributions?

If contributions (deductible and non-deductible) in excess of the amount allowed are made to an IRA, an excise tax equal to 6% of the excess contribution is imposed until the excess is withdrawn or used to reduce later years’ contributions.


· When must I begin withdrawals from my IRA?

Withdrawals from an IRA must begin before April 1, of the year after the owner attains age 70½. These minimum withdrawal rules do not apply to Roth IRAs. The rules relating to how distributions may be structured are substantially the same as the rules for qualified plans except the qualified joint and survivor annuity provisions do not qualify.

Source: Tax Facts 2007, National Underwriter Company

IRA Funding Alternatives