- An investor must decide whether an Individual Retirement Account is right for him. They are a way to invest money for retirement while enjoying tax savings that can add up to a considerable amount over time. IRAs have similarities to employer-sponsored 401(k) plans. However, many of the rules and limits are different. Investors are allowed to have both IRA and 401(k) accounts. There is a significant penalty for withdrawing IRA money before retirement.
- Investors must decide which type of IRA they want to open. There are two main types. A Traditional IRA allows certain taxpayers to deduct their contributions. Invested money is tax-free, but taxes must be paid when the money is withdrawn in retirement. A Roth IRA allows no deductions, but the investment grows tax-free, and there are no taxes for distributions in retirement.
- There are strict limits on who can enjoy the benefits of IRAs. Only taxpayers below certain income levels are allowed to open, convert, or contribute to a Roth IRA. People of all incomes can open, convert, or contribute to a Traditional IRA, but above certain income levels they are not allowed to take the tax deduction. These limits change nearly every year. Check with the Internal Revenue Service for the latest limits.
- Once a taxpayer decides to open an IRA, she needs to find a financial institution to hold it. An IRA is a tax designation, not a particular type of investment. IRA funds can be invested in financial commodities such as stocks, bonds, and mutual funds. The most popular hosts of IRAs are mutual fund companies, but banks and brokerage houses also have them.
- Once a taxpayer settles on a financial institution for their IRA, he must fill out the paperwork. These involve contact information, social security number, and beneficiary. The IRA can be funded with money from other accounts or through a "rollover" from another retirement plan like a 401(k). The taxpayer must also designate how he wants the IRA money invested once it is funded.
- The IRS limits the amount of money that can be contributed to an IRA in a given tax year. This limit changes from year to year, so check with the IRS for the latest limits. Higher "catch up" contributions are allowed for taxpayers older than 50 years old. Taxpayers are allowed to make IRA contributions for a tax year until the tax filing deadline. This is usually April 15 of the following calendar year.
Comments
moonsun55 said
on 8/29/2009 good info.