Individual Retirement Accounts
Individual Retirement Accounts have been among the most popular investment for the clergy since they were introduced by congress in the mid-1970's. Their special tax incentives continue to help you assure retirement living that meets your preretirement standards. Social Security can be considered a very limited level of retirement income, at best. As a result, you should begin providing for additional retirement income. An IRA is a very advantageous way to do that. Anyone under age 70 1/2 with earned income may establish an IRA. The non-working spouse of an IRA participant is also eligible if under 70 1/2.
An Individual Retirement Arrangement (IRA) is the most basic sort of retirement arrangement. There are two types of IRAs.
Traditional IRA - A traditional IRA is a personal savings plan that gives you tax advantages for saving for retirement. Contributions to a traditional IRA may be tax deductible - either in whole or in part. Also, the earnings on the amounts in your IRA are not taxed until they are distributed. The portion of the contributions that was tax deductible also does not get taxed until distributed. A traditional IRA can be established at many different financial institutions, including banks, insurance companies and brokerage firms.
An individual retirement arrangement, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.
To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year and you, or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. In addition, taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes.
Compensation does not include earnings and profits from property, such as rental income, interest and dividend income or any amount received as pension or annuity income, or as deferred compensation.
The most you can contribute to your traditional IRA for 2005 is the smaller of $4,000 or your taxable compensation for the year. For 2005, the $4,000 is increased to $4,500 if you are 50 or older. Keep in mind that contributions on your behalf to a traditional IRA reduce your limit for contributions to a "Roth IRA". If neither you nor your spouse is covered by a qualified retirement plan at any time during the year, your allowable contributions to a traditional IRA will be fully deductible.
If you, your spouse, or both of you are covered by a qualified retirement plan, your IRA deduction may be reduced or eliminated, depending on the amount of your Modified Adjusted Gross Income and your filing status.
Remember, you do not have to contribute the maximum amount to an IRA. Nor do you have to contribute each year. Your contribution must be made by April 15th to consider it for the previous year.
However, the maximum amount of your IRA deduction is reduced proportionately as your adjusted gross income increases. Adjusted gross income (AGI) is your gross income after subtracting certain items. As a general rule, these limits do not apply to most clergy.
You may start withdrawals, without penalty, as early as age 59 1/2, but you must start by April 1st of the year following the year in which you attain age 70 1/2 Withdrawals prior to age 59 1/2 except in the case of permanent disability or death, are subject to a 10% IRA premature distribution tax. In addition, you may be subject to a withdrawal penalty from the financial institution. Regardless of age, funds withdrawn from an IRA are taxable as ordinary income in the year received. At retirement, you will probably be in a lower tax bracket.
Roth IRA - A Roth IRA is also a personal savings plan but operates somewhat in reverse compared to a traditional IRA. For instance, contributions to a Roth IRA are not tax deductible while contributions to a traditional IRA may be deductible. However, while distributions (including earnings) from a traditional IRA may be included in income, the distributions (including earnings) from a Roth IRA are not included in income. For both IRA types - traditional and Roth - earnings that remain in the account are not taxed. A Roth IRA can be established at the same types of financial institutions as a traditional IRA.