One of the easiest ways to increase your wealth is through the use of tax-deferred accounts. You do not pay taxes on tax-deferred investments while they are growing and, as a result, they grow faster. Employer sponsored retirement plans like 401(k)s are one example of tax-deferred accounts, and IRAs are another. While you may or may not have access to an employer sponsored retirement plan, everyone with earned income is eligible to set up an IRA.
IRAs are a type of account that you fund with your choice of investments. There are two basic types of IRAs: Traditional and Roth. Deciding which type of account to open can be a difficult decision and one answer does not fit all. Each type of IRA account can have very different financial consequences both now and in the future so get as much information as possible before you decide. Here are some IRA basics to help you decide which one is best for you:
• There are no income limits for eligibility. Anyone with earned income can set up a traditional IRA.
• Depending on your income and your eligibility to participate in an employer sponsored retirement plan, your contributions may be tax deductible. In general, singles with incomes of less than $65,000 and couples filing jointly with incomes of less than $109,000 are eligible to deduct their contributions. Note: Income limits for couples increase to $176,000 if they are not eligible to participate in an employer sponsored plan.
• Contributions must stop at age 70 1/2.
• Withdrawals are required at age 70 1/2, and withdrawals before age 59 1/2 may incur a 10% penalty. Taxes are due in the year withdrawals are made.
• Eligibility to set up a Roth IRA is limited based on your income. They are available to single-filers earning less than $120,000 a year or couples earning less than $176,000 annually.
• You can make contributions beyond age 70 1/2 however your contributions are never tax deductible.
• There is no mandatory distribution age. Your contributions can remain in your account indefinitely.
• Principal contributions (money you put in) can be withdrawn at any time without penalty.
• Withdrawals (including principal and earnings) are 100% tax free if you follow the rules and regulations – a benefit that could mean thousands of dollars in future tax savings.
Choosing to invest in an IRA is not just a good idea, it can help your money grow faster, and save money on your taxes as well
Note: Contribution limits for both IRAs in 2011 is $5,000 and $6,000 for those over age 50. In the future, contribution limits will increase based on the rate of inflation. While you can split your contributions between the two types of IRAs, your total contribution in both types cannot exceed the current contribution limits.