Retirement Plans

Business

Quiz 12 :
Individual Retirement Arrangements

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Quiz 12 :
Individual Retirement Arrangements

Individual retirement arrangements (IRAs) Individual retirement arrangements are part of contribution type plans. Individual contributing towards the plan could receive tax deductible contribution up to certain limit. The investment income received on plan would be subject to income tax. The contribution or income received on plan would be taxable as ordinary income when it is received or available. In 1974s there was rapid increase in private retirement system however still 40 million workers were not part of qualified pension or profit sharing plans. Government considering this included new provision in Employee Retirement Income Security Act which provided these workers to establish their own retirement plan which was on deferred tax basis. This new provision started the beginning of individual retirement arrangement (IRAs). Government has made number of changes in the workings of IRAs. Due to number of changes made different types of IRAs with different characteristics was introduced with varying features and tax treatments. IRAs was used as funding vehicle by some employers which would sponsor simplified employee pension plan and savings incentive match plan for employees. The Small business job protection act of 1996 eliminated salary reduction simplified employee pension plan in 1996. With curtailment of SARSEPs, SIMPLE plans was created by employer which could be used as IRA or 401(k) plans.

Individual Retirement Arrangement (IRA) also referred to as individual retirement account is a personal savings account holding various tax advantages established by the government to provide a medium to the individuals to save money for retirement. Congress recognised the need for such IRA after getting aware of the fact that though employer designed retirement plan has spread rapidly yet there were a huge number of citizens/workers (above 40 million estimated) left behind not being covered under any benefit plan for retirement.  As such, provisions were made in Employee Retirement Income Security Act in 1975 that lead to establishment of IRA which was a type of defined contribution plan under retirement plans that provided the individuals with the facility to invest on their own in tax-deferred basis and secure their retirement life. In order to provide such retirement security to each and every individual in workforce, Congress felt the need for establishment of IRAs.

Individual retirement arrangements (IRAs) Individual retirement arrangements are part of contribution type plans. Individual contributing towards the plan could receive tax deductible contribution up to certain limit. The investment income received on plan would be subject to income tax. The contribution or income received on plan would be taxable as ordinary income when it is received or available. For one to be eligible for IRAs individual should have earned income from personal services and investment income do not qualify for these plans. For rollover contribution to IRAs there is no dollar limit set however for regular annual contribution is limited to $2,000 or 100% of earned income whichever is lower. In 2002, the annual contribution was increased to $3,000. Due to limitation of deduction many would shift to other qualified plans. The plan design for other qualified plan would include more contribution to these plan which would provide higher deduction and thus attract more individual.

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