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.


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