Facts to Help Taxpayers Understand the IRA

Individual Retirement Arrangements (better known simply as IRAs) are accounts into which someone can deposit money to provide financial security when they retire. Here are some terms and definitions related to IRAs to help people learn more about how the arrangements work:

Traditional IRA: Contributions to a traditional IRA may be tax-deductible. The amounts in a traditional IRA are not generally taxed until you take them out of the account.

ROTH IRA: Contributions to a Roth IRA are not tax-deductible, but if the IRA owner satisfies certain requirements, qualified distributions are tax-free.

Savings Incentive Match Plan for Employees: commonly known as a SIMPLE IRA. It allows employees and employers to contribute to traditional IRAs set up for employees. It is ideal as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.

Simplified Employee Pension: Better known simply as an SEP-IRA, it is a written plan that allows an employer to make contributions toward their own retirement and their employees' retirement without getting involved in a more complex qualified plan. An SEP is owned and controlled by the employee.

Contribution: The amount of money someone puts into their IRA. There are limits to the amount that someone can put into their IRA annually. These limits are based on the age of the IRA holder and the type of IRA they have.

Distribution: Essentially a withdrawal. This is the amount someone takes out from their IRA.

Required distribution: A taxpayer cannot keep retirement funds in their account indefinitely. Someone with an IRA generally must start taking withdrawals from their IRA when they reach age 70 and a half. Roth IRAs do not require withdrawals until after the death of the owner.

Rollover: This is when the IRA owner receives a payment from retirement plan and deposits it into a different IRA within 60 days.

RETIREMENT CONTRIBUTION LIMITS WILL INCREASE IN 2019

The IRS announced cost of living adjustments for qualified retirement plans for tax year 2019. Some of the key updates are as follows:

● The 401(k) contribution limit increases to $19,000 in 2019 (up from $18,500 in 2018).

● The IRA contribution limit, which last increased in 2013, increases from $5,500 to $6,000 in 2019.

● The contribution limit for SIMPLE retirement accounts is increased from $12,500 to $13,000.

● The contribution limit for a Defined Contribution Plan (such as a 401(k) plan with employer match) increases to $56,000 in 2019 (up from $55,000 in 2018).

● The additional catch-up contribution limits for individuals aged 50 and over remains unchanged in 2019 ($6,000 for 401(k) plans, $1,000 for IRAs, and $3,000 for SIMPLE plans).

Here are Facts to Help Taxpayers Understand the Different Filing Statuses

Single: This status is for taxpayers who aren’t married, who are divorced, or who are legally separated (if legal separation is permitted under the state law of the taxpayer).

Married Filing Jointly: If taxpayers are married, they can file a joint tax return. If you're legally married on December 31, you're considered married for that full year. When a spouse passes away, the widowed spouse can still file a joint return for the year the spouse passes away.

Married Filing Separately: A married couple can choose to file two separate tax returns. This may benefit them if it results in less tax owed than if they file a joint tax return (although this is rarely the case). They can also use this status if each wants to be responsible only for their own tax.

Head of Household: In most cases, this status applies to a taxpayer who is not married and who paid more than half the cost of keeping up a home for themselves and a dependent who qualifies as either a qualifying child or qualifying dependent.

Qualifying Widow(er) with Dependent Child: This status may apply to a taxpayer if their spouse died during one of the previous two years and they have a dependent child. Other conditions also apply.