First and foremost, you need to know the answer to, what does IRA stand for? Individual Retirement Accounts (IRAs) allow you to save for retirement by taking advantage of certain provisions in the tax code. As with everything else in the tax code, the rules about IRAs can change from year to year. Here’s what you need to know for 2015.
An IRA can be set up by a bank, a mutual fund or your favorite online brokerage. There are two kinds of IRAs that you can open:
- Traditional IRA – Gives you a tax break on the money that you save for retirement.
- Roth IRA – Allows you to put in after-tax money, but you won’t pay taxes when you withdraw it later.
Which one is better? The answer is a familiar one: It depends.
It’s a pay me now or pay me later contest. Would you rather pay taxes on the money you pull out of your savings in retirement? If so, then opt for a traditional IRA. If you’d rather have tax-free money during your sunset years, opt for a Roth IRA.
According to a recent survey by TIAA-CREF, few Americans consider IRAs a priority. That same poll showed that 39 percent of respondents didn’t know enough about IRAs to even consider using one.
Maggie Shard, president and wealth advisor of Shard Financial Services in Fenton, Mich., says “Americans are missing out on the importance of an IRA because many don’t understand that they have investment options. They also don’t understand investing, so it’s easier to spend their money on vacation and appliances.”
Here are some IRA tips for 2015:
- There Are Contribution Limits
If you’re under the age of 50, you can contribute up to $5,500 per year to an IRA. After the age of 50, you can add another $1,000 to that number. Your earnings will grow tax-free, but the amount you can deduct from your taxes depends on your total income and whether or not you have a retirement plan at your place of employment.
In 2015, the deduction phases out if you have an income between $61,000 and $71,000 and you’re filing as a single taxpayer. If you’re married and filing jointly, the deduction phases out if your income is between $98,000 and $118,000.
If you’re contributing to a Roth IRA, the deduction phases out between $116,000 and $131,000 if you’re a single filer and between $183,000 and $193,000 if you’re married and filing jointly.
- Yes, You Can Contribute to Both a 401(k) and an IRA
If you’re offered a 401(k) at your job, you can contribute to that while still contributing to your own IRA. However, you might not be able to deduct all of your contributions.
Contributing to both a 401(k) and an IRA is a terrific financial strategy if you’ve maxed out the contribution to your 401(k).
- IRAs Are More Flexible Than 401(k) Plans
IRAs give you the option to decide where you invest your money. That gives them an added level of flexibility over IRAs.
If you think that you’ve got what it takes to manage your own money for retirement, pick an IRA with a qualified broker and diversify your portfolio as you see fit.
- There Is a Penalty for Early Withdrawal
If you pull money out of your IRA before you reach the age of 59 ½, you’ll not only pay your ordinary income tax rate, you’ll also pay an additional 10 percent penalty for the early withdrawal.
Do yourself a favor: Have enough cash in the bank for three to six months’ worth of expenses before you start putting money into an IRA. That way, if an emergency arises, you won’t be tempted to pull money out of your IRA early and face a penalty.
Keep in mind, though, that you can pull money out of a Roth IRA prior to retirement age without paying a penalty. That’s because you’ve already contributed after-tax money to that account.
- Plan Your Withdrawals
Once you reach retirement age, you can start taking distributions from your IRA. By the time you reach 70 ½, you’re required to take a minimum from your account every year or you’ll face penalties. You should consult an accountant or a tax adviser to determine that minimum.
You’ve worked hard your entire life. Be sure that you’re ready for retirement with proper planning that makes use of the tax code to maximize your benefits.
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