Individual Retirement Accounts (IRA’S) are tax-advantaged accounts intended to supplement income after retirement. Tax law provides guidelines of use and maximum contributions to sway people from using the account as a simple savings account.
Why would I choose to open an IRA?
An IRA is a great tool to provide for income after retirement. With some features similar to a 401k (like you would set up at work), tax-deferred earnings make your funds grow quickly until you take “distributions” after retirement. Anybody who reports taxable earnings on income is eligible to open an IRA account, and can choose to make yearly contributions to said account (with tax advantages) until retirement age.
Are there different kinds of IRA accounts?
The simple answer is, Yes. There are a few different types of IRA accounts, all of which have slightly varying rules or regulations.
Roth IRA-Contributions to a Roth IRA are made after taxes have been levied, therefore, all account transactions are tax-free and withdrawals are usually not taxable.
Traditional IRA-Unlike the Roth, contributions to a traditional IRA are tax deductible and taxes are paid on withdrawals after retirement.
Simple IRA-A simple IRA allows both individual and employer contributions. It is similar to a 401k or pension plan, and often acts as one for employers who do not offer 401k’s but want to offer retirement benefits. Although it is called an IRA, the contribution limits are lower than other types of IRA accounts and administration of the Simple IRA is easier than other IRA accounts.
Self-Directed IRA-This account is more complicated than other IRA accounts, as the individual allocates the investments in the account. A self-directed IRA is intended for those who want to maintain all of their portfolio. A trustee or custodian holds the assets of the account on behalf of the owner. Tax reporting and maintenance of the Self-Directed IRA can get complicated and is usually reserved for those with a deep knowledge of markets and tax laws.
SEP IRA-For the self-employed or small business, the SEP IRA (Simplified Employee Pension) is a variation of other IRA accounts by allowing small business owners to offer plans for both themselves and their employees.
Where can I open an IRA?
Most banks, brokerage firms and credit unions offer IRA products. Finding the best fit for you requires some research and shopping. In many cases, brokerage firms have the most competitive offers relating to maintenance and transaction fees. Obviously, you want an IRA that will yield the most and cost the least, but keep in mind that if a firm offers you the flexibility of changing investments with minimal fees, this could mean a difference of thousands of dollars in the long term. Because fees for account features vary, shop very carefully for your IRA to find the ideal fee structure for your situation.
Can I open more than one IRA account?
Yes.
Can children have IRA’s?Yes, and no…the account owner must have reportable taxable income in order to open an IRA, and the maximum contribution can not be more than the reportable income for the year.
How do I fund my IRA?
As you can see from the above table, in 2009 the most you will be able to contribute to an IRA is $5000. With most institutions or brokerages, you can set up automatic withdrawals to fund your IRA or make contributions at your own discretion with deposits to the account. You may also want to rollover an old 401k account from a previous employer. Luckily, there are NO RESTRICTIONS as to how much you can rollover into your IRA account. The annual contribution limit does not apply, because the funds are already “tied up” in a retirement vehicle.
If I already have a 401k with my employer, can I also open an IRA?
Absolutely. 401k’s have similarities to IRA’s, but do not affect the contribution amounts related to IRA’s. The more tax deferred retirement money you have set aside, the better off you will be come retirement.
What if I can’t contribute to my IRA this year?
IRA accounts do not require regular investment. Although it is in your best interest to “max out” your account, if you are unable to contribute to the account, there is no penalty (besides hurting your retirement fund).
For more IRA faq’s, visit the IRA question and answer page, on the official IRS website or the faq page at ira.org.
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I haven’t looked in awhile, but I was under the impression that you have to have earned income to contribute to an IRA. So young children would not be eligible (though there are loopholes), but teenagers are once they start working.
Thank you Gem. You are right…my bad.
Color me embarrassed!
Edited.
I failed to mention…thank you.
Just wanted to be sure the right information is out there! So many people don’t quite understand IRAs, so it’s a great post, always good to have the information in one place!