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IRAs: The Traditional IRA

BOSTON (CBS) – Workers do not know enough about retirement plans. One of the easiest plans to use is an IRA, an Individual Retirement Arrangement. IRAs have been around since 1974 and were created to help individuals not covered by retirement plans at work.

According to the Investment Company Institute (ICI) about 30% of U.S. households owned IRAs in 2015. Although most U.S. households were eligible to make IRA contributions, only 14%. And even less used the catch-up provisions.

IRAs are a useful tool for retirement planning. If your employer does not sponsor a retirement plan at work such as a 401(k) or you are only working part time you can start your own retirement plan using an IRA.  The IRS and Congress do have some rules though:

  • You must have earned income to contribute. Alimony does qualify.
  • Contributions are limited to $5,500. There is a $1,000 catch-up provision if you over age 50.
  • You may be eligible for a deduction for the amount you contribute
  • If there is no retirement plan at work you are 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 and the deduction is phased out for income more than $99,000 but less than $119,000
  • 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 10% 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)

There is also a new IRA; the myRA a federal guaranteed program for folks who want to start to save for retirement. There are other IRAs you can use to start your retirement planning which I think are better.

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.

One more thing: Your IRA may be deductible for federal tax purposes but it is not deductible in Massachusetts. Keep track of all of your contributions and when you do retire you will be able to withdraw you IRA contributions free of MASS taxes.

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You can hear Dee Lee’s expert financial advice on WBZ NewsRadio 1030 each weekday at 1:55 p.m., 3:55 p.m., and 7:55 p.m.

Subscribe to Dee’s Money Matters newsletter here.

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