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

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