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Individual Retirement Account (IRA)

See Also:
Pension Plans
401k
Keogh Plan
Payroll Accounting
Deferred Income Tax

Individual Retirement Account (IRA) Definition

An individual retirement account or IRA is a personal account that an employee of a company can set up. The contributions to the account are tax deferrable until the funds are withdrawn after age 59 1/2. There are also several contribution limits which are set at $5000 per year.

Individual Retirement Account (IRA) Explained

An IRA is a great way for employees to invest a percentage of their paychecks every year so that they will have plenty when they decide to retire. Some IRA advantages are that the contributions are tax free or tax deferred. This means that the account holder will not have to pay taxes until they withdraw the funds after 59 1/2. However, if they take it out sooner than this age then there is a penalty fee. The great advantage of tax deferred contributions is that the account can earn more on interest over time than if the funds were first reduced by taxes and then put into an account. Another disadvantage is the contribution limit. This means that the individual can only earn so much over time even if the employee did want to contribute more.

Individual Retirement Account (IRA) Example

Tim is working for Wawadoo Inc. and has decided that he would like to start an IRA account. He sets up the plan through the company and begins to contribute 10% of his paycheck to it. Tim makes $90,000 per year meaning that if allowed he would make contributions of $9,000 (90,000 * .1). However, he is only allowed to contribute $5,000 into his individual retirement account.

Individual Retirement Account

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Keogh Plan

See Also:
Pension Plans
Deferred Income Tax
Tax Brackets
Contribution Margins
Employee Stock Ownership Plan (ESOP)

Keogh Plan Definition

The Keogh plan was developed by a United States Representative from New York named Eugene Keogh. A Keogh plan is a tax deferred retirement plan which has some advantages to the self-employed companies that have less than 10 employees working for them.

Keogh Plan Meaning

There are two types of Keoghs. The first is a defined contribution plan in which a fixed sum or percentage of a paycheck each period is contributed to the keogh account. In total a person can generally contribute 25% of their annual earnings at a max of $49,000. The employer is also able to contribute a total of $16,500 to each employee’s account making the total contribution $65,500. This is higher than other contribution plans making it a huge benefit.

The second, which is known as a defined benefit plan works off of a complicated pension formula which requires the work of an actuary. Although both of these plans receive more in benefits and contributions than most other retirement funds, there are several disadvantages as well. There is a penalty if a person pulls money out of their account before they’re 59 1/2. Withdrawals are also taxable as they are taken out of the account. However, because you are able to contribute cash without it being taxable the account is able to grow more quickly.

Keogh Plan Example

Dexter owns a Law firm in which he has 9 employees, Dexter wants to contribute the maximum amount of 25% of his salary to his Keogh Plan. Dexter makes a salary of $300,000 at this rate Dexter would contribute $75,000 into his Keogh account. However, she is only allowed to contribute a total of $65,500 ($49,000 + $16,500) as are the limits to a Keogh retirement plan.

Keogh Plan

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Adjusted Gross Income Definition

See Also:
Financial Ratios
Operating Profit Margin Ratio
Net Profit Margin
Adjusted Gross Income
Margin vs Markup

Adjusted Gross Income Definition

The adjusted gross income definition (AGI) is a taxpayer’s gross taxable income. It consists of total income minus allowable adjustments. These allowable adjustments, also known as “above the line deductions,” reduce the amount of income used to calculate limitations on itemized deductions and other deductions and allowances.

Subtract standard or itemized deductions, also known as “below the line deductions,” from AGI to compute the taxable income amount. Taxable income is the amount used to calculate the amount of tax that must be paid. When referring to above the line or below the line deductions, adjusted gross income is the line.

Adjusted Gross Income = Total Income – Above the Line Deductions

Taxable Income = Adjusted Gross Income – Below the Line Deductions

Above the Line Deductions

Above the line deductions are the allowable adjustments subtracted from total income to get adjusted gross income. Then on page 1 of the 2007 U.S. Individual Income Tax Return Form 1040, these allowable adjustments are lines 23 – 35. Furthermore, some of these adjustments require further paperwork. But do not itemize above the line deductions.

Above the line deductions include items such as educator expenses, moving expenses, alimony paid, student loan interest, and other items.

Below the Line Deductions

Below the line deductions are the standard or itemized deductions subtracted from adjusted gross income to get taxable income. Then on page 2 of the 2007 U.S. Individual Income Tax Return Form 1040, find standard deductions in the left margin. Furthermore, you must list itemized deductions on a separate form.

Below the line deductions include items such as charitable contributions, mortgage interest, unreimbursed business expenses, IRA contributions, and other items.

Taxable Income Formula

Use the following taxable income formula:

Taxable Income = Total Income – Above the line Deductions – Below the line Deductions

adjusted gross income definition

IRS Link

IRS website: irs.gov

2007 U.S. Individual Income Tax Report Form 1040: irs.gov/pub

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401k

See Also:
Pension Plans
How to select a PEO
Gross Up
Payroll Accounting
Keogh Plan
W2 Form

401k Account Definition

A 401k plan is a retirement plan that allows employees to contribute pre-tax earnings to a group company account. The 401k account or the funds in the account are invested for the employees in stocks, bonds, or money market instruments. These contributions are then taxed as they are withdrawn when the employee decides to retire. Often times there is an employer contribution percentage that is associated with the employee contributions.

401k Explained

401k plans have several benefits to investors or employees. First of all, it allows employees to contribute pre-tax earnings. This allows the fund to make more over time even if it is taxed when withdrawn. Generally, it is better to pay taxes later and contribute more to a fund up front.

Another great thing about 401k plans is that they invest with a pool of money from all the employees in that company with a 401k plan. Like the pre-tax earnings this allows the fund to make more over time than if one employee were investing for him/herself. This type of fund is not only contributed by the employee, but often times by the employer as well. Again this allows an employee to max his 401k benefits, and gives him/her a wonderful retirement. A disadvantage is the fact that there is only a certain amount that you are allowed to contribute. It limits for the years 2009 and 2010 the amount is equal to $16,500.

401k, 401k account

 

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