Face it, most working folks eventually retire, and you will need money to support yourself when you do. If you don’t already have a large employer retirement plan, an IRA is something you should seriously consider.
My grandparents managed to make it with a small savings account and Social Security, but those days are long gone. And that is precisely why Individual Retirement Accounts (IRA’s) were created, as a savings incentive to help supplement the federal retirement plan.
Here’s what you really need to know.
Annual deposit maximums in an IRA.
The first fact is that money deposited in an IRA must come from earned income. (Alimony income qualifies for IRA deposits.) You must earn at least the amount you are going to deposit.I’m not going to bore you with the historical deduction allowances, but keep in mind that it has only increased from $1,500 in 1975 to $5,500 in 2017. You may qualify for the 50 and over additional contribution of another $1,000. Not much of an annual savings for most. However if invested smart, it could grow significantly and help a lot when you need it.
Traditional IRA defers taxes.
The Traditional IRA is the original IRA. The contributions are tax deductible and when removed, tax is paid on that as ordinary income. It was designed because at the time there was the assumption that incomes at retirement would be lower, and the tax percentage on that same money would be lower. It was designed to give you more cash with tax savings when you retired.
Roth IRA saves taxes.
This option showed up in 1997 because people were beginning to accumulate assets and have significant retirement income. Having tax deferred income in the Traditional IRA no longer yielded tax savings. Deposits into a Roth IRA are not tax deductible, so the investment is considered “after tax”. However when the funds are withdrawn, the earnings are tax free. There are a number of other advantages, but the most important is that none of the Roth IRA withdrawals are taxable. So that is guaranteed to put more money into your wallet. In the early 1980’s, many people scrambled to convert their Traditional IRA’s to Roth’s and paid the tax at that point, to take advantage of the future tax savings.
Where it’s invested.
Many people don’t realize it, but IRA’s can be invested in most vehicles except real estate and physical metals (gold bullion or silver). In addition to the simple bank CD’s, these accounts can be invested in stocks, bonds, stock funds, mutual funds, and insurance annuities to name a few. The type of investment will depend on your age and your willingness to take risk. But you are in the driver’s seat.
Deadline for making deposits.
You have until April 15th of the following year to make your IRA deposits (by the end of the tax season). However, be certain that the deposit is credited to the correct year. For example, when you make your 2016 deposit on April 1, 2017, be sure the funds are labeled 2016 deposit.
When to begin account.
It’s never too early and it’s never too late to start saving for retirement. My youngest client Katie M. opened an IRA at the age of TWO, after she received payment for baby modeling for Babies ‘R Us. Her father has made wise investments, and now, at the age of 16, Katie’s $500 investment is close to $6,000!
ABOUT THE AUTHOR: Ellen Wanamaker is a Women’s Financial Specialist and has been a federally licensed tax practitioner for more than 30 years. She is also the author of the popular e-book “Divorce Exit Strategies.”
Due to many requests, Ellen’s practice has expanded from the previous divorce specialty to a general financial practice, helping women in many stages of life set up their finances on autopilot. You may review additional information on tax and financial subjects and motivation by signing up for her complimentary blog.
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