A penny for a rainy day is what an IRA is really all about. The future is a horizon of the unknown, and yet, each one of us can prepare to cushion the effect of the unknown. One way to do it is through a safety net, the IRA. IRA stands for Individual Retirement Account that an American citizen can take advantage of. It is an investment tool that allows one to set aside funds for retirement savings and at the same time provides some great tax advantages.
Effective 2010, the maximum IRA contribution for those under age 50 is 100% of earned income or a maximum of $ 5,000.00, whichever is less. For those 50 years old and above, one is entitled to 100% of earned income or a maximum contribution of $ 6,000.00 which ever is less.
You can open an IRA at an established bank, or through a mutual fund or brokerage firm. It should be done on a cash basis or a cash equivalent. If one does not have any pension plan at work or can meet certain income guidelines set by the government, definitely his IRA contributions can be tax deductible.
There are four types of IRAs. For individual taxpayers, one can have two options to choose from: a Roth IRA or a traditional IRA. Generally, contributions to traditional IRA are tax deductible depending on the taxpayer’s income, tax filing status and coverage used by the employer-sponsored retirement plan. Roth IRAs are not tax deductible.
For employers, they can set up IRAs and they can choose from: a SEP or SIMPLE IRA. SEP is normally for small businesses or self employed individuals. A SIMPLE IRA is for both the employer and the employee who can make contributions with lower limits and less costly administration.
One can withdraw his IRA contributions once the account owner reaches age 59 and a half and its penalty fee. At the demise of the account owner, the designated beneficiary can withdraw the
contribution based on his life expectancy. At his option, the account owner can withdraw his IRA contributions even before age 59 and a half based on certain rules so as to be exempt from penalties.
An account owner can also roll over his distribution to another IRA of his account. A word of caution: amounts converted from a traditional to a Roth IRA must stay untouched for a minimum of five (5) years to avoid penalty.
IRA is definitely a safety net that one can rely on in times of need.
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