IRA Instructions
The individual retirement account (IRA) is an account you can use to save for your retirement on a tax-advantaged basis. You must understand how IRAs work to avoid tax penalties imposed by the IRS. While the rules for IRAs vary slightly depending on the type of financial institution that holds the account, IRAs generally work in approximately the same way.
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Instructions
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Open an IRA with the financial institution of your choice. To open the account, you need to fill out a form with your personal information, including your name, address, Social Security number and other information. Submit the completed form, and the financial institution will process it and open your account.
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Fund your IRA. Typically, you have several choices. You could transfer money from another bank account, write a check or use a debit or credit card to fund your account. Once the money is in your account, you can start investing.
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Choose the investments for your portfolio. Once you have money in your account, you can invest it into stocks, bonds, mutual funds, exchange-traded funds and other securities. Your investment options are limited by what the financial institution that holds your IRA offers. Some provide more choices than others. Obtain assistance from your broker to create a diversified portfolio, or create the portfolio based on your own research. When you contribute to a traditional IRA, your contribution is tax-deductible, but funds are taxed as ordinary income when they are withdrawn in retirement. If you put money into a Roth IRA, your contribution will not be tax-deductible, but money can be withdrawn tax-free in retirement.
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Make regular contributions to your account. You can set up an automatic deposit for your account that will take money from your regular bank account and put it into the IRA. If you get in the habit of contributing to your IRA, you can build your account balance quickly. You cannot start taking withdrawals from your traditional IRA until you are at least age 59 1/2. In 2011, you can contribute a maximum of $5,000 per year, or $6,000 per year if you are age 50 or older.
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Start taking distributions from the account once you reach retirement age of 59 1/2. You can choose how much you want to take out of your account each year. If you wait until you reach age 70 1/2, you must begin to take required minimum distributions from a traditional IRA based on your account balance and life expectancy. No minimum distributions are required with Roth IRAs.
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Tips & Warnings
You can switch IRA providers if you are not satisfied with the features or service provided for your account. To do this, open a new IRA with a different provider and fill out a transfer request with your existing provider. The money in your account will be transferred to the new account.
Avoid taking money out of your traditional IRA before you reach the age of 59 1/2, if possible. If you do, you must pay a 10 percent early distribution penalty in addition to regular income taxes.
