A traditional IRA allows you to invest in your retirement. To secure an IRA retirement, you must set up an account with a financial institution and continue to contribute to that account.

Two main types of IRAs exist and each has its own benefits, such as tax-free growth or tax-deferred advantages. Because financial experts speculate that retirees may require up to 85 percent of their pre-retirement income during retirement, other savings plans may not provide enough money to fully fund a retirement. Therefore, you are encouraged to consider utilizing your IRA plan to supplement your social security benefits and other employer-sponsored plans.

The following sections explain what an IRA retirement plan is, how and why it is used and who can use it. Additionally, you can determine your IRA contribution and deduction limits, as well as other regulations imposed by federal laws. You are advised to review this information before deciding to contribute or withdrawal from your account. If you do not currently have a traditional IRA, then you can also use this information to decide about investing in one.

What is an IRA?

Individual Retirement Arrangements (IRAs) are created and managed by financial institutions like banks. Unlike a 401k, a standard IRA plan can be withdrawn from at any time and requires you to make regular contributions. However, IRAs are not employer-sponsored plans and are entirely dependent on your monetary contributions and investment choices.

Types of IRAs

There are two types of IRAs available for retirement, and they are as follows:

  • Traditional IRAs. This account type requires you to make contributions with funds that may qualify for deductions on your tax return. The funds you receive on your tax return may become tax-deferred until distribution.
  • Roth IRAs. In this type of IRA plan, you must make contributions using money on which you have already paid taxes. These funds may also become tax-deferred, even during distribution in some circumstances.

Money and movable assets from other retirement accounts such as a 401(k) or 403(b) can be transferred, or “rolled over,” into a traditional IRA account, should an account holder wish to keep their retirement funds in one place. The money then becomes tax-deferred and is subject to all IRA tax guidelines. Rollovers may be conducted via direct rollovers, trustee-to-trustee transfers or 60-day rollovers.

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Note: You only have 60 days to rollover money and assets into your IRA after you receive a distribution, and only one rollover is permitted per year.

IRA Eligibility

Anyone who has earned taxable income is eligible to contribute to a traditional IRA until they become 70 and a half years old. An account holder’s spouse may also contribute to an IRA account, depending on their age and tax filing. An account holder’s modified adjusted gross income (MAGI) and his or her spouse’s participation in employer-sponsored retirement plans determines their eligibility for tax benefits, such as tax deductions and Roth contribution.

Note: Different eligibility guidelines may apply to Roth IRA accounts.

How to Open an IRA

To open a traditional IRA account, you must contact a local financial institution. The process of applying for your IRA retirement is outlined in the following steps:

  1. Choose the type of IRA that you would like best (i.e., traditional or Roth).
  2. Select your potential investing options.
  3. Complete the online or print application for the financial institution to which you are applying.
  4. Pay the minimum fee to open your account.

Usually, banks require you to add at least $1,000 to your account when opening it, but this amount may vary. Once your IRA plan is active, you can begin investing your funds, making annual contributions to the account and enjoying the unique benefits your account offers.

IRA Guidelines

Although a traditional IRA account requires you to make annual contributions, there are contribution limits and deduction limits that may affect your contributions and pension plan withdrawals. A list of the IRA contribution limits based on your age is provided below:

  • Contributors 49 years of age and younger: You may contribute up to $5,500 to your account.
  • Contributors 50 years of age and older: You can make a catch-up contribution of $1,000 each tax year for a total of up to $6,500.

Charges for early withdrawals include a 10 percent penalty tax. However, this penalty will not be charged if you meet one of the following conditions:

  • You are 59-and-half years of age older.
  • You or your spouse has died.
  • You are disabled.
  • You are using IRA funds to pay for qualifying medical expenses or certain health insurance premiums.
  • You are a qualified first homebuyer.
  • You are paying for some higher education expenses.
  • You are converting your traditional IRA into a Roth account.

IRA Benefits

The benefits of a traditional IRA pertain to tax breaks and investment opportunities. With a traditional IRA, you may invest in stocks, bonds, cash or gold to enable your savings to grow over time. According to Fidelity Investments, the safest form of investment is in stocks, as they have proven to outlast inflation and market changes. By investing, you increase your total savings and are more likely to remain financially stable throughout your retirement. However, you are encouraged to continue investing and saving up until your retirement to secure your future. The IRS does not permit IRA fund investments in life insurance or collectibles such as artwork, stamps or coins. If you invest in collectibles, you may be required to pay additional taxes.

IRA accounts may also reduce your total tax payments. After calculating the contributions you make to your account each year, you may be able to deduct them from your taxes which would lower the bill. Because IRA accounts provide tax benefits to your savings, your money can grow faster than it would in a taxable account. IRA plans are flexible and independently-controlled, meaning that anyone can open an account regardless of their current employment. You are encouraged to consider these possible benefits before opening an account.

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