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Know Your IRA or Individual Retirement Account

Individual Retirement Account

An Individual Retirement Account or Arrangement can be the perfect savings option if you're looking for a way to save for retirement while taking advantage of an excellent tax management tool.

To get the maximum benefit out of this investing option, you must understand the basic facts about Individual Retirement Account (IRA) distribution rules, Individual Retirement Account (IRA) withdrawal implications and what your Individual Retirement Account (IRA) maximum contribution limits are.

Some vital facts you should know about your IRA:

  • You can open an IRA account if you are under 70 ½ years old with a taxable income
  • IRA is a personal savings plan
  • Your IRA lets you keep more of your tax-free money
  • The earlier you open an IRA, the more you save
  • Traditional IRAs let you save on taxes now
  • A Roth IRA saves you tax on retirement
  • Borrowing from your IRA is not allowed
  • Early IRA withdrawal carries penalty
  • You can have multiple IRAs in different institutions

Depending on your income, you may be able to fit into a lower tax bracket with your tax-deductible contributions while you work, and enjoy being in a low tax bracket when you retire.

IRA Maximum Contribution Limits

You can contribute up to $5,000 per year. If you’re 50 years or older, you’re allowed an additional $1,000 “catch up” contribution. For the current year, you can make your Individual Retirement Account (IRA) contribution before April next year. If you haven’t yet met your contribution for the previous year, you have until April of this year to do so.

IRA and Tax

How much of your IRA is tax-deductible will depend on your taxable income during the tax year. For example, if you or your spouse actively participates in a qualified or employer-sponsored plan, then your tax-deductible contribution can be reduced based on your adjusted gross income or AGI.

If you file jointly, the reduction depends on your combined AGI. So if neither you nor your spouse is part of a 401K or another qualified retirement plan, your IRA contribution is fully deductible.

Different types of IRAs

You’ll come across Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs. While traditional and Roth IRAs are for individual taxpayers who can contribute 100% compensation up to a specific maximum limit, SEP and SIMPLE IRAs are employer-established retirement plans. Traditional IRA Contributions are tax-deductible based on your income, tax filing status and employer coverage. Roth IRA contributions are not tax-deductible.

You might also want to consider a self-directed IRA if you are not quite happy about the current returns on your IRA savings. A self-directed IRA gives you the freedom of a wider investment choice where your savings grow a lot faster than the traditional IRA. However, this is subject to certain conditions.

IRA Withdrawal

In general, you should avoid an early IRA withdrawal.

You’re eligible for an IRA withdrawal at the age of 59 ½.

If you’re thinking of an earlier IRA withdrawal, you can avoid the 10% early withdrawal fee only under certain specific circumstances.

Talk to an experienced tax expert who knows IRA distribution rules inside out and can help you with planning a penalty-free IRA distribution.

Whether or not an IRA is the right choice for you depends on your taxable income, your age and your family status.

Why not consult your financial advisor to help you decide?

 

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