The simplest of all retirement plans is the individual retirement account (IRA), authorized by Congress in 1974. An IRA is a tax-favored savings plan that allows eligible participants to make contributions with pre-tax dollars and defer taxation on earnings until retirement.
There are several limitations to IRAs:
- Contributions cannot exceed the lesser of $2,000 per year or 100 percent of compensation ($2,250 for a spousal IRA).
- Contributions may be made only up to age 70 and deposits must be made before filing individual taxes (April 15).
- The account holder may not use funds to purchase life insurance or collectibles (except gold or silver coins issued by the U.S. Government).
- If a person (or his or her spouse) is an active participant in an employer-maintained retirement plan with income exceeding certain levels ($25,000 for single persons or $40,000 for married couples), the IRA contribution may be partially or totally nondeductible.
Businesses may sponsor IRA savings programs for employees. Through payroll deduction, employees set aside small amounts for deposit into an IRA contract. An employer can make IRA contributions for all or select employees. In such instances, the recipient's reported annual taxable salary will include the IRA contribution, although this amount would then be deducted (conditions permitting) by the employee on his or her year-end tax filing.
