IRA is the abbreviation for an Individual Retirement Account, and this is your beginner’s guide; the basic information that you need before making any decisions.
There are 11 types of IRA’s, but we shall focus on the 3 that are the most common: Traditional, Roth, and Education. All can give you a tax advantage and complement other retirement funds, such as employer 401K’s. Choosing the best IRA avenue for your personal needs depends on your investment goals, income, and age.
A Traditional type of IRA allows you to contribute up to $4,000 annually. It is possibly a tax deductible, depending on your salary and marital status. A married couple can contribute to two separate IRA’s for a total of $8,000.
Minimum distributions from a traditional IRA must be taken by April 1 of the year after you turn the age of 70 ½.
A Roth IRA has contributions that are made on a non-deductible basis, as the contributing dollars have already been taxed. Any withdrawals taken are tax-free as long as the account has been in place for at least 5 years, and you are at least 59 ½ years of age.
Currently, contributions can be up to $4,000 a year to a Roth IRA, as long as you or your spouse have earned an income in which your AGI (adjusted gross income) is within the pre-set guidelines. There are no age requirements for mandatory distributions.
The Education IRA, now called a Coverdell Education Savings Account, allows contributions of up to $2,000 per beneficiary annually. Contributions must be made before the beneficiary turns 18 years old.
Withdrawals for tuition, fees, and room and board, are usually tax free. Even some college prep private school costs are generally tax-free. The amount of contribution you can make decreases if your adjusted gross income in one tax year is more than $190,000 when filed jointly. All contributions are phased out completely if your adjusted gross income hits $220,000 annually when filed jointly.
There are rollover IRA’s to be taken advantage of if you switch employers and have a 401K with your former employer. You may be able to leave your 401K with your former employers investment firm, or try to slide it in with your new company. Whatever choice you make, be sure to consult a professional, non-commission based investor.
Finally, we have withdrawals. If you take money out o an IRA before the age of 59 ½, you could be succumbed to a 10% penalty. Here are a few ways other than age for you to avoid paying the penalty:
- You have un-reimbursed medical expenses that are more than 7.5% of your adjusted gross income, or no medical insurance.
- You are disabled.
- You are the beneficiary of a deceased IRA owner.
- Some instances if you are receiving distributions in the form of an annuity
- The distributions are not more than your qualified higher education expenses.
- You use the distributions to buy, build, or rebuild a first home.
- The distribution is the result of an IRS levy.
