Depending on whether an individual has an IRA or SEP IRA, different contribution (deposit) and distribution (withdrawal) rules apply.

Individual Retirement Accounts (IRA)
Anyone with earned income can set up an IRA.

  • Contributions
    • For the 2008 tax year, most individuals can invest up to $5,000 into their IRA.

    • Investors who are age 50 and over can make additional "catch-up" contribution of $1,000.

    • Those who are covered by employer-sponsored retirement plans might not be permitted to contribute the full $5,000.

  • Distributions
    • IRA distributions cannot be made before age 59 ½ without a penalty.

    • Withdrawals before the minimum age can be made only under conditions of termination of employment or hardship - no breaking open the piggy bank to buy a Corvette.

    • If your client invokes either of these conditions, she cannot make another contribution for one year after the withdrawal.

    • Federal and state tax penalties apply to pre-retirement withdrawals.

    • IRA distributions must begin before age 70 ½. If an investor does not start withdrawing the money by that maximum age, she faces a tax penalty equal to half of the required amount not distributed.

  • Other Considerations
    • Married, single-income couples can establish additional spousal IRAs.

    • Also, IRAs can be bequeathed to a beneficiary in the event of the investor's death.

    • IRAs can be used to receive "rollover" payments from other retirement plans, including employer-sponsored plans and other IRAs. As long as the money stays in a tax-deferred account, then it remains a non-taxable event until the money is taken out as income.

Simplified Employee Pension (SEP)
An employer-sponsored flavor of IRA is the SEP IRA, in which an employer sets up IRAs for each qualified employee and contributes directly to them.

These small-business sponsored plans are considered easier to administer than a conventional pension plan, and employers have been moving toward these for some.

For everything and more on IRAs, see our feature Individual Retirement Accounts.



Types of Employee-Sponsored Plans

Related Articles
  1. Retirement

    11 Things You May Not Know About Your IRA

    These little-known features will help you get the most out of your retirement savings.
  2. Retirement

    Traditional or Roth IRA: What's the Difference?

    Traditional IRAs and Roth IRAs have similarities and differences investors need to know.
  3. Retirement

    What's the Tax Hit on an IRA Withdrawal?

    How much taxes you'll pay on IRA withdrawals depends on a variety of factors. Use this guide to plan ahead.
  4. Retirement

    How an IRA Works After Retirement

    You've read a lot about saving for your future retirement with IRAs. But what happens to the account when the future is here, and you actually retire?
  5. Retirement

    Roth vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.
  6. Retirement

    5 Secrets You Didn't Know About Traditional IRAs

    A traditional IRA gives you a current-year tax benefit and future years of tax savings – minus the income restrictions that limit who can have a Roth IRA.
  7. Retirement

    How Much It Takes to Max Out Your IRA

    IRAs have certain tax advantages that allow your nest egg to grow at a faster rate. But there are annual limits on how much you can contribute.
Frequently Asked Questions
  1. What's the Difference Between a Market Economy and a Command Economy?

    Set by supply and demand, a market economy operates through a price system; in a command economy, governments control the ...
  2. What Factors Cause Shifts in Aggregate Demand?

    Find out how aggregate demand is calculated in macroeconomic models. See what kinds of factors can cause the aggregate demand ...
  3. Who are Whole Foods' (WFM) main competitors?

    Learn more about Whole Foods Markets, who insists its products are sustainable. Thanks to the competition, however, its marketing ...
  4. What are the Differences Between Ex Works (EXW) and Free On Board (FOB)?

    Learn about Ex Works and Free on Board, the main difference between these Incoterms, and the responsibilities of buyers and ...
Trading Center