An individual retirement account (IRA) allows you to save money for your own retirement. Money deposited into a traditional IRA account is tax deductible. Contribution limits apply to IRA accounts, but those limits change often and usually the limit increases. Funds in an IRA can be invested in a variety of vehicles, such as stocks, bonds and certificates of deposit. You should be aware of the deduction rules in California if you live in that state and want to use an IRA. Rules for Roth IRAs are different, but the IRA designation alone typically refers to a traditional IRA.
Deduction of IRA Contributions
You may deduct contributions into your IRA in California up to $75,000 for individuals and up to $85,000 on a joint return. California does not conform to the indexing of the income limitation for traditional IRAs. This may create a discrepancy between the federal deduction rules and the state deduction rules when filing your tax returns.
Non-Duducted Contributions Pre-1987
Contributions made prior to 1987 are not taxable until you have recovered your pre-1987 basis (contributions made before 1987 on which you have already paid taxes) in the IRA account. Once you've recovered your basis, the remainder is taxable at California's ordinary income tax rates.
Non-Deducted Contributions Post-1986
During the distribution phase of your IRA (which usually begins after age 59 1/2 without penalty), a part of your IRA balance will be considered your basis (contributions on which you have already paid taxes) and part of the distribution will be considered gain in the account. The gain is subject to California state income tax.
- retirement fun image by Pix by Marti from Fotolia.com