BOSTON (CBS) – IRAs were introduced in 1974. These plans were designed to help individuals not covered by retirement plans at work and to give those individuals changing jobs the ability to rollover retirement assets and retain the tax deferred status.

According to the Investment Company Institute (ICI) about one-quarter of U.S. households owned traditional IRAs in 2014. Although most U.S. households were eligible to make IRA contributions, few did so. Only 12 percent of U.S. households contributed to any type of IRA in tax year 2013.

IRAs are a very useful tool for retirement planning but obviously not enough folks are contributing to them that are eligible to use them.

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. The IRS and Congress does have some rules:

  • 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.
  • If your spouse is eligible for a retirement plan then you are limited by your joint income and Deductions phased out between $98,000 to $118,000.
  • 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)

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.

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