The Facts About Traditional IRAs

View Comments
(Photo by Drew Angerer/Getty Images)

(Photo by Drew Angerer/Getty Images)

420x316-grad-lee Dee Lee
Dee Lee is a Certified Financial Planner who received a diploma in...
Read More

BOSTON (CBS) – IRAs, Individual Retirement Arrangements, have been around almost 40 years (since 1974) and they are still a good way to save for retirement. According to the Investment Company Institute, (ICI) 40% of all households have at least one IRA and there is over $5 trillion invested in IRAs.

IRAs are a very useful tool for retirement planning but not enough folks are contributing to them that are eligible to use them. A primer on IRAs is needed.

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 rules:

• You must have earned income, the W-2 kind of income. Alimony does qualify though.
• Contributions are limited to $5,500 for this year. There is a $1,000 catch up provision for workers over age 50.
• 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 $178,000 to $188,000
• 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.

View Comments
blog comments powered by Disqus
Follow

Get every new post delivered to your Inbox.

Join 2,526 other followers