response to concerns over the adequacy of retirement savings, Congress has
created incentives to encourage individuals to save more for retirement
through a variety of retirement plans. Some retirement plans are
employer-sponsored, such as 401(k) plans, and others are established by individual
employees, such as Individual Retirement Accounts (IRAs).
This report describes the primary features of two common retirement savings
accounts that are available to individuals. Although the accounts have
many features in common, they differ in some very important aspects. Both
traditional and Roth IRAs offer tax incentives to encourage individuals to
save for retirement. Contributions to traditional IRAs may be tax-deductible
for taxpayers who (1) are not covered by a retirement plan at their place
of employment or (2) have income below specified limits. Contributions to
Roth IRAs are not tax-deductible and eligibility is limited to those with
incomes under specified limits.
The tax treatment of distributions from traditional and Roth IRAs differs.
Distributions from traditional IRAs are generally included in taxable
income whereas distributions from Roth IRAs are not included in taxable
income. Some distributions may be subject to an additional 10% tax penalty,
unless the distribution is for a reason specified in the Internal Revenue Code
(for example, distributions from IRAs after the individual is age 59 ½ or
older are not subject to the early withdrawal penalty).
Individuals may rollover eligible distributions from other retirement accounts
(such as an account balance from a 401(k) plans upon leaving an employer)
into IRAs. Rollovers preserve retirement savings by allowing investment
earnings on the funds in the retirement accounts to accrue on a tax-deferred,
in the case of traditional IRAs, or a tax-free basis, in the case of Roth IRAs.
The Retirement Savings Contribution Credit (also known as the Saver’s Credit)
is a nonrefundable tax credit of up to $1,000. It was authorized in 2001
to encourage retirement savings among individuals with income under
The report explains the eligibility requirements, contribution limits, tax
deductibility of contributions, and rules for withdrawing funds from the
accounts. It also describes the Saver’s Credit and provisions enacted
after the Gulf of Mexico hurricanes in 2005 and the Midwestern storms in
2008 to exempt distributions to those affected by the disasters from the 10%
early withdrawal penalty.
Date of Report: January 30, 2013
Number of Pages: 19 Order Number: RL34397 Price: $29.95
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