IRAs: Individual Retirement Arrangements
An Individual Retirement Arrangement (IRA) is one of the best
ways to save for retirement while deferring taxes and compounding
interest over the years.
Discover 7 simple investing strategies you can use to boost your 401K and IRA returns and outperform the market.
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Traditional IRAs have many of the same advantages as Roth IRAs and some key
distinctions all of which will help investors decide which type of
retirement account is the right choice for them.
IRAs are for long-term investment
horizons
For the most part an IRA should be used as a long range savings
plan. Tying up funds in an IRA can be costly if savers decided to
withdraw funds before age 59 ½. There are penalties and taxes will
be due at the taxpayer’s current taxable rate because withdrawal
will be considered taxable income in the year it is taken.
IRA are tax deferred plans -
withdrawals are considered taxable income
IRAs are generally funded with pre-tax dollars and taxes on the
investment and earnings are deferred until withdrawal. This is
different from the Roth IRA, where the account is funded with
after-tax dollars and is never taxed further if used for qualified
purposes. Even the earnings on a Roth IRA can be completely exempt
from taxation. For both the traditional IRA and Roth IRA anyone with
taxable compensation from wages, bonuses, self-employment income,
alimony or separation maintenance, can open an IRA account up to the
maximum annual contribution level. Non-working spouses are also
eligible for IRAs up to $4,000 per tax year beginning in 2005 and
gradually adjusting for inflation.
Everything you need to know about IRAs
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IRA Information
IRA rules - review
eligibility requirements for Individual Retirement
Arrangements
IRA contribution limits -
reviewing how much you can contribute each year
IRA rollover - moving
financial assets into an IRA from other plans
IRA withdrawals and distributions
- rules that apply when taking money out
Self-directed IRA - taking
control of your investment decisions
SEP IRA - Simplified Employee Pension IRA
account.
Simple IRA - Savings Incentive Match Plan for
Employees IRA
Real Estate IRA - eligible real estate investments
for your IRA
Educational IRA - how to open an educational IRA
account.
Spousal IRA - funding a Spousal IRA
account. |
A quick review of the major IRA guidelines and decisions you will
need to make to maximize this powerful tax-deferred retirement
plan.
IRAs have mandatory withdrawal
rules
Another difference between a traditional IRA and a Roth IRA is
that with traditional IRAs the retiree must make mandatory
withdrawals by April 1st the year after the year in which they reach
the age of 70 ½. If the minimum amount is not withdrawn, the
remaining amount is taxed an excise tax at a rate of 50%, incentive
enough for most IRA account holders to be sure to withdraw the funds
on time each year. There are no such minimum withdrawal requirements
on a Roth IRA.
IRAs have maximum contribution
limits
As with the Roth IRA, the traditional IRA has limits as to how
much can be deposited into the account each year. The amount
increases annually and is adjusted by $500 to
000 per year
(depending on the year) for older individuals so that they can have
the opportunity to catch up on their savings for retirement. The
amount that can be contributed also depends on Adjusted Gross Income
(AGI), with separate amounts for single taxpayers and those who are
married filing their taxes jointly.
Early withdrawal penalties apply
There are circumstances where funds from either a traditional IRA
or Roth IRA can be withdrawn early without being penalized. These
include certain expenses related to education, the disability or
medical expenses of an investor, or in the case of their death, the
beneficiary can receive the funds without penalty.
What type of IRA to chose?
To determine which type of IRA is really the best choice an
investor should consider their income, whether or not they will need
the money before age 70 ½, or if they would rather keep the account
funded beyond that age. Also a consideration is whether the tax
savings helps with their financial goals at a younger age or if they
will be better off funding an IRA with after tax dollars.
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