BOSTON (CBS) – Many workers have stopped contributing to their retirement plans. In 2010, which is the last year we have data for, only 14% of U.S. households contributed to any type of IRA. I think a primer on IRAs is needed.

IRAs, Individual Retirement Arrangements, have been around for a long time now (since 1974). And they are a very good way to save for retirement. According to the ICI, the Investment Company Institute, 40% of all households have at least one IRA and there are over $5 trillion invested in IRAs.

If your employer does not sponsor a retirement plan at work such as a 401(k) you can start your own retirement plan using an IRA. As always, whenever the government is involved with money the IRS and Congress set the rules:

  • You must have earned income, the W-2 kind of income. Alimony also is eligible.
  • Contributions are limited to $5,000 for 2012. There is a catch up provision for workers over age 50. They can contribute an additional $1000.
  • You may be eligible for a deduction for the amount you contribute.
  • If your spouse is eligible for a retirement plan then you are limited by your joint income.
    –  Deduction phased out between $173,000 to $183,000
  • Money in the IRA grows tax-deferred.
  • Withdrawals from your IRA will be taxed as ordinary income.
  • Withdrawals must begin once you reach age 70½, the IRS is strict about this.
  • Withdrawals before age 59½ usually result in a 10% penalty, but there are some exceptions:
    – Death
    – Disability
    – Medical expenses in excess of 7.5% of AGI
    – Health insurance premiums if unemployed for 12 consecutive weeks
    – Qualifying higher education expenses for family members
    – Qualifying first time home purchase ($10,000 lifetime limit)
    – Substantially equal payments made over life expectancy (IRS rule 72t)

If you have a retirement plan at work, fund that first. If your employer does not offer a retirement plan, use an IRA for your retirement savings. For more help, check out the IRS’s website, and download publication 590.

You can use an IRA even if your employer offers a retirement plan. Your deduction for the amount you contribute may be limited.

If you are single and your adjusted gross income (AGI) is less than $58,000, you’re golden and can deduct the full $5,000 and once you reach $68,000 there is no deduction. If you are married filing jointly, the limit is phased out between $92,000 and $112,000 of AGI. I know it’s not fair that the limit on married folks filing jointly is not twice as much as the single taxpayer limit.

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