Things You'll Need:
- Income to invest
-
Step 1
Understand that there are many different types of IRAs. Traditional and Roth are the most common.
-
Step 2
Recognize that the amount you contribute to a traditional IRA is subtracted from your taxable income, reducing your tax liability.
-
Step 3
Keep in mind that IRA withdrawals are subject to income taxes and a 10 percent penalty if you withdraw funds before you reach 59 years of age. There are, however, exceptions and you may be able to make a hardship withdrawal without incurring a penalty.
-
Step 4
Understand that Roth IRAs are not tax-deductible. However, they are more flexible than traditional IRAs and allow for withdrawals, after five years, without taxation or penalties, as long as you meet certain requirements.
-
Step 1
Know that IRA mutual funds allow you to save for retirement on a tax-deferred or tax-free basis. At the same time, you can invest in mutual funds, potentially increasing the money you'll have to fund your retirement.
-
Step 2
Recognize that IRAs treat all earnings in the same manner. This means that capital gains, interest and dividends are all handled in the same way.
-
Step 3
Understand that retirement plans are not liable for taxes when earnings are received. However, unrelated business income may be treated differently.
-
Step 4
Understand that all distributions from an IRA with mutual funds are handled in the same way. If you meet the criteria for tax-free distributions, all distributions will be tax-free, regardless of their origin. For other plans, earnings, regardless of their origin, are taxable as ordinary income.
-
Step 5
Recognize that with an IRA mutual fund, you have the option of having monthly contributions automatically withdrawn from your bank account. This can make investing easier.







Comments
MichaelWeiss said
on 9/18/2007 In general, tax efficiency is an attractive characteristic for a mutual fund. However, in a IRA account, tax efficiency is irrelevant and this is where you could make asset allocation changes without incurring a tax liability.
Michael A. Weiss, CFA
The Editor
The Mutual Fund Investor
http://www.mutualfundinvestor.net