zt: IRA

http://www.fatwallet.com/t/52/194441/

Q1. SN, could you briefly describe what an IRA is?

A1: An IRA is a contractual arrangement between three parties:(a) You (a U.S. person and taxpayer who earns taxable income from gainful employment);(b) Uncle Sam a/k/a the Internal Revenue Service; and(c) an IRA custodian which you choose to hold the assets of your IRA Account, typically a stock broker, bank, credit union, or mutual fund company.


Q2. What do you mean by "contractual relationship?"

A2. An IRA involves a lot of special paperwork which has to be signed by you and an officer of your IRA custodian and submitted to the Internal Revenue Service. Uncle Sam requires these documents to be completed in order for you, as the taxpayer, to receive the tax benefits of an IRA. For the financial institution, opening and maintaining IRAs is more complicated than opening a standard brokerage or deposit account.


Q3. What's a Traditional IRA? What's a Roth IRA?

A3. Both of these are "arrangements" you make to invest money towards your retirement. A summary of each follows:(a) Taxpayers contributing to a Traditional IRA typically may deduct some or all of their annual IRA contribution directly from their taxable income. For many taxpayers, this may also provide a cut in their marginal tax rate - BUT Congress has deductibility phase-outs affecting taxpayers who work in a job where they are covered by an employer pension or 401(k) plan. Beware of this trap. Contributions within the Traditional IRA grow on a tax-deferred basis, and only are taxable by Uncle Sam (and most states) at the time funds are withdrawn, typically in retirement.(b) Taxpayers contributing to a Roth IRA receive NO tax deductions for their annual IRA contribution. However, contributions within theRoth IRA grow on a tax-exempt basis, based on the current tax laws which would allow all earnings to be withdrawn in retirement free of tax liability. CAUTION: Current tax laws suggest that Roth IRA assets can grow totally exempt from taxation. What cannot be predicted with certainty is whether Congress makes future legislative changes to the Roth IRA which might repeal some or all of this tax-exempt status.


Q4. Are IRAs protected from creditors during bankruptcy?

A4. On April 4, 2005, the U.S. SUPREME COURT issued a unanimous ruling determining that Congress intended for IRAs to be sheltered from creditors during a bankruptcy proceeding. Here are some articles of interest:Supreme Court Holds That IRAs May be Shielded From CreditorsIRAs Can't Be Seized In BankruptcySupreme Court IRA Ruling Protects Retirement MoneySupreme Court Issues IRA/Bankruptcy Decision