Page 184 - Essentials of Payroll: Management and Accounting

Benefits
$160,000, and begins to decline at $150,000. Earnings within the plan
are shielded from taxation until distributed from it.
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It is mandatory to begin withdrawals from an IRA as of age 70 /2;
if distributions do not occur, then a penalty of 50 percent will be
charged against the amount that was not distributed. When funds are
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withdrawn from an IRA prior to age 59 /2 they will be taxed at ordi-
nary income tax rates,and will also be subject to a 10 percent excise tax.
However,the excise tax will be waived if the participant dies,is disabled,
is buying a home for the first time (to a maximum of $10,000), is pay-
ing for some types of higher education costs or medical insurance costs
that exceed 7.5 percent of the participant’s adjusted gross income (as
well as any medical insurance premiums following at least one-quarter year

of receiving unemployment benefits). The following list reveals the
wide range of IRA accounts that can be set up:
• Education IRA. This type of IRA is established for the express

purpose of providing advanced education to the beneficiary.
Though contributions to this IRA are not exempt from tax-
able income, any earnings during the period when funds are
stored in the IRA will be tax-free at the time when they are
used to pay for the cost of advanced education. The annual
contribution limit on this IRA is $500, and is limited to the
time period prior to the beneficiary reaching the age of 18.
The maximum contribution begins to decline at the point
when joint household income reaches $150,000 (and is elimi-
nated at $160,000), and $95,000 for a single tax filer (and is
eliminated at $110,000). The amount in this IRA can be
moved to a different family member if the new beneficiary is
less than 30 years old. The amount in the IRA must be dis-
tributed once the beneficiary reaches the age of 30. If a distri-
bution is not for the express purpose of offsetting education
expenses, then the distribution is taxable as ordinary income,
and will also be charged a 10 percent excise tax.

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