Contribute to an IRA

By Robin Applegarth CRPC®

I’m a big fan of IRAs–Individual Retirement Accounts. I started saving in these tax-advantaged investments before I had access to a qualified employer plan. I like the Do-it-Yourself aspect of IRAs. The Roth IRA is especially great if you don’t ever want to pay taxes on your investment. Robin

Roth IRA

It’s not often that Uncle Sam hands out gifts, but IRAs (Individual Retirement Accounts) are one example. The only requirement is that you have to have earned income within certain limits, and put the money in the IRA before you get the gift.

What’s the gift? In the case of a Roth IRA, it’s freedom from future taxation on all growth in your IRA. (To get those benefits, you’ll need to hold the Roth IRA for at least 5 years and until after age 59 and a half.)

We like to call Roth IRAs the “chocolate” fudge version of IRA, for their superior tax advantages.

The benefits can be huge. If you know about the power of compounding, you’ll see that if you put money in and give it decades to grow, you may easily have 10 times the amount you put in. It will all be tax-free when you take it out in retirement if you follow the Roth rules.

Roth IRA contributions require that you fall below certain income guidelines. Here are the 2012  income limits from the IRS Roth charts.

You may contribute up to $5,500 for the 2016 year, and an extra $1000 “catch-up” if you’re over age 50.  These totals are independent of any workplace contributions to a 401(k), SIMPLE IRA or SEP IRA.

If you can’t afford to contribute the full amount, just put in what you can. Many mutual fund companies will accept contributions of $100 per month if you make it automatic. Auto pilot savings are often easier.

As long as you have sufficient earned income to cover the Roth IRA contribution, you may contribute at any age. Roth IRAs won’t give you a current year tax-benefit, as they are made with after-tax dollars, but we think they’re terrific for people with more than a decade to retirement.

 Traditional IRAs give you a current year tax benefit.

Traditional IRA

Here comes the “vanilla” fudge version. Traditional IRAs provide tax-deferred growth rather than tax-free growth. If you follow the IRA rules, you’ll get growth without current taxation.

Only when you take the money out of the IRA investment will Uncle Sam come with his hand out for income taxes. And Please, wait until after age 59 and a half so you don’t get hit with 10% early withdrawal penalties in addition to the taxes. (I recommend Turbo Tax if you’re doing taxes yourself.)

Traditional IRAs give you a current year tax deduction, as they’re made with pre-tax dollars. This will lower your taxable income and reduce taxes for that year.

Again, there are income and other guidelines to get this deductible IRA, although anyone with earned income can make a non-deductible IRA. Here are the IRS rules for IRAs.

Traditional IRAs come with the requirement to start taking distributions out by the time you reach age 70 and a half.

Spousal IRA

If you’re not working but your spouse is, you can still contribute to one of these IRAs. They’re a great way to boost family retirement savings. Choose either Roth or Traditional IRA for your Spousal IRA. Join our free email list  to download this article.

For the full requirements and rules about IRAs, check with your investment company or the IRSPublication 590.

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