Artículo de opinión: ¿Qué es una cuenta IRA?
Author CPA Rubén M. Rodríguez-Vega is former president Puerto Rico Society of CPAs.
La Cuenta de Ahorro para la Jubilación Individual, más conocida como IRA, es una de las pocas opciones que ofrece el Código de Rentas Internas de Puerto Rico como mecanismo de refugio fiscal para obtener desgravaciones al presentar la declaración de la renta. Además, la IRA promueve la creación de un fondo privado e individual para la eventual jubilación del titular de la cuenta.
This savings vehicle for a retirement fund becomes even more significant at times when statistics reflect that we are living to be older and that we will live approximately one third of our life in the retirement period. On the other hand, promoting this savings discipline becomes more relevant due to the uncertainty of the availability of the federal Social Security funds at the time of our retirement.
This type of account has many benefits, but the most attractive is that taxpayers can take a deduction of $1 in their income tax return for each $1 of contribution to the IRA account. The maximum amount of contribution allowed by the Code for the taxable year 2012 (which corresponds to the income tax return that must be filed by or before April 16th, 2013) is $5,000 per taxpayer.
In the case of married taxpayer filing jointly, a contribution to an IRA may be made for each individual spouse, even if one of them is not working or generating income. This means that the maximum contribution in this case will be $10,000.
It is important to remember that under the new Code, anyone who participates in an employer-sponsored retirement plan, either from a private business entity, the government, or in the case of self-employed individuals, they will also be able to contribute the maximum amount allowed by the Code to the IRA without limitation to the contribution that is made to its own retirement plan.
Determining benefits
Some people might ask: How can I determine the tax benefit that will result from my contribution to the IRA? The tax benefits or savings that will be derived from what otherwise you could pay for income taxes, is determined based on the effective tax rate resulting upon completing your tax return and computing your income tax responsibility.
For example, if your tax responsibility results in 33 percent of net taxable income, then a contribution of $5,000 to an IRA will represents a tax saving of $1,650 (this is, $5,000 x 33 percent). Following this same example, if the taxpayer is married filing a joint tax return and they both decide to contribute $5,000 to their respective IRAs, then the tax saving will be of $3,300 (contribution of $10,000 x 33 percent effective tax rate.)
Another benefit that the IRA provides is that the account’s accumulated value is deferred from the payment of taxes. This means that the income earned by way of interests or dividends paid to the account is not taxable until funds are withdrawn from the IRA, which provides an opportunity for greater growth at maturity of the account.
Then, who may contribute to an IRA? The Code allows for all taxpayers who receive income from salary or wages, or earnings attributed to professions or occupations and who have not reached 75 years of age, to contribute to an IRA. The maximum contribution will be limited to $5,000 or the Adjusted Gross Income, whichever is lower.
Types of IRA options
Upon determining that the person is eligible to contribute to an IRA, then the next question will be: What type of IRA account must be established?
There are two basic types of IRAs: the Regular IRA (or deductible IRA) and the Roth IRA (also known as non-deductible IRA). The Regular IRA is the most commonly used, since it is the vehicle that provides the tax benefit of claiming a deduction in the income tax return.
On the other hand, the contribution to a Roth IRA cannot be taken as a deduction for income tax purposes; however, the whole amount of the account, including its growth or income earned, will be exempt from payment of income tax if funds are not withdrawn before taxpayer reaches retirement age (60 years).
After learning about the benefits that may be obtained from contributing to an IRA and upon determining the amount that will be contributed, the next step is to select the investment instrument to deposit the contribution.
For this purpose it is extremely important to consider the investment objectives and risk tolerance of each person.
Essentially, there are four types of investment vehicles for the IRA accounts: first is a Certificate of Deposit (CD type of account) with a fixed interest rate and fixed term of maturity. The Federal Deposit Insurance Corporation insures this deposit up to a maximum of $250,000 when funds are deposited in a commercial bank member of the FDIC. The second type of IRA is an investment fund also known as Mutual Fund whose yield depends on the behavior of the securities in which the fund invests. The FDIC does not insure this type of deposit, so it will be subject to fluctuation and the risk of loss of principal.
The third alternative of IRA is a hybrid of the previously described ones. It consists of a Certificate of Deposit (CD type of account) usually with a five-year maturity term through which the FDIC insures the principal up to $250,000 and the yield is subject to the behavior of a market index. As such, this provides the opportunity to participate of a potential growth of the securities market without risking its principal deposited, or as many would say, the best of both worlds.
The fourth alternative of investment available in the market is a deposit in an annuity, which is generally offered by insurance companies. The FDIC does not insure this type of investment, reason for which its guarantee depends on the safety and soundness of the insurance company issuing the instrument.
We recommended that you consult your financial advisor or your Certified Public Accountant to determine the most convenient type of investment instrument to contribute to your IRA.
In addition, we suggest carefully reading the account disclosures that are part of the promotional materials, to obtain information regarding charges and penalty fees that will apply in the case of early withdrawal of each instrument.
If it is $1 deduction for every $1 contribution, so does this also mean that a taxpayer
could save as much as $5000 in their 2012 taxes? That seems really great. But what
would be the risks involved in this said IRA?
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