A Quick Guide To Understanding Your Individual Retirement Account

A Quick Guide To Understanding Your Individual Retirement Account



A Quick Guide To Understanding Your Individual Retirement Account
It's never too early to​ begin preparing for your retirement and one of​ the best ways to​ prepare is​ to​ set up an​ Individual Retirement Account (often referred to​ as​ an​ IRA) .​
The purpose of​ an​ IRA is​ to​ serve as​ a​ personal tax-qualified retirement savings plan .​
Anyone who works, whether as​ an​ employee or​ self-employed, can set aside a​ set amount in​ an​ IRA, with the earnings on these investments tax-deferred until the date of​ distribution .​
In addition, certain individuals are permitted to​ deduct all or​ part of​ their contributions to​ the IRA .​
Plus, as​ of​ 1998, certain individuals can also set up Roth IRAs, to​ which contributions are not deductible, but from which withdrawals at​ retirement won't be taxed.
It doesn't take much to​ set up an​ IRA .​
The trustee (or custodian) can be a​ bank, mutual fund, brokerage house or​ other financial institution .​
You cannot be your own trustee .​
An IRA can be established and a​ contribution made after year-end, no later than the due date for filing the income tax return for that year, not including extensions .​
This generally means that you have until April 15th of​ the following year to​ make the contribution and deduct it​ on your tax return.
The most you can contribute to​ an​ IRA in​ any single year (as of​ 2018) is​ the smaller of​ $4,000 or​ an​ amount equal to​ the compensation includible in​ income for the year .​
Those 50 years old and above will also be allowed to​ make additional $1,000 catch-up contributions to​ an​ IRA each year to​ help them save more for retirement.
The same limit applies even if​ you have more than one IRA, or​ more than one type of​ IRA .​
When both you and your spouse have compensation, you can each contribute the maximum, which means $8,000 total ($10,000 if​ you are both 50 or​ over) .​
In 2018, IRA contribution limits will be raised to​ $5,000, while the catch up contribution for those 50 years old and above will remain at​ $1,000 .​
You do not have to​ contribute the full amount allowed every year .​
You may skip a​ year or​ even several years .​
You may resume making contributions in​ any subsequent year, but you cannot add additional funds to​ make up for those years when no contribution was made.
Contributions must be from compensation .​
This can be from wages, salaries, commissions and other sources of​ earned income .​
Contributions do not include such things as​ deferred compensations, retirement payments, or​ portfolio income from interest or​ dividends.
You can contribute more than the allowable amount, however, a​ 6 percent excise tax penalty will be assessed .​
No contributions may be made to​ an​ inherited IRA, in​ a​ form other than cash, or​ during or​ after the year in​ which the individual reaches age 70.5 .​
You must begin taking distributions from an​ IRA no later than April 1st of​ the year following the year in​ which you reach age 70.5, or​ the year in​ which you retire, whichever is​ later .​
This is​ a​ quick and general overview of​ IRAs .​
The rules are slightly different for Roth IRAs, which have their own contribution and distribution limitations .​
Before setting up an​ IRA, take the time to​ talk to​ your banker, accountant, or​ financial advisor to​ make sure you have a​ firm grasp on your options and set up the IRA which best serves your personal needs .​
You can learn more about IRAs online from the Internal Revenue Service here: www.irs.gov/taxtopics/tc451.html




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