Ohio National Financial Services, California Annuities

Now, we'll review the different types of defined contribution plans offered by both private sector employers and public and non-profit employers. (Note: For each plan, the funding of participants' pensions — by employers alone or by both employers and employees — can be in the form of tax-advantaged contributions to annuities.)

Individual Retirement Accounts (IRAs)

Introduced in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA), an IRA is a tax-deferred retirement account for individuals to set aside money for their old age.

IRA earnings are not taxed until withdrawn at age 59½ or later (with a 10 percent tax penalty if taken earlier). The exact amount depends on the year and the client's age. Contributions are 100 percent deductible for clients whose adjusted gross incomes (AGI) are less than current minimum ($25,000 in 2010) and who are single or the head of the household. The AGI is twice the individual amount for those who are married and filing a joint return. However, to receive beneficial tax treatment, only money from earned income can be contributed to an IRA; investment income is specifically disallowed, as is income from personal services, salary, wages, tips, commissions and bonuses.

IRA withdrawals should not be delayed past age 70½. Indeed, at age 70½, IRA owners are required to take a minimum distribution (also known as RMD, which uses a formula set up by the IRS to determine the amount) and pay taxes on those withdrawals.

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