Saturday Finances—IRA Basics

Learning about personal finances

Individual Retirement Account
IRAs are a great way to save for the long-term

What's an IRA?
An IRA is a type of investment account that comes with tax benefits to help you save for retirement.

The annual contribution is $5,500 for the 2015-16 tax years; $6,500 for investors over 50 years old.

Many workers start their IRA savings through an employer's retirement plan, often a 401(k).

According to the Federal Reserve, nearly a third of working-age American have no retirement savings or pension, including 19% of those between the ages of 55 and 64.

3 types:
Traditional IRA: offers a tax deduction for the tax year in which the contribution was made.  Taxes are paid when the money is taken out.

Roth IRA:  Taxes are paid on the money going in.  Take the money out tax-free in retirement.

Rollovers:  A traditional IRA "rolled over" from a qualified retirement plan.  Rollovers move assets from an employer-sponsored plan, such as a 401(k) or 403(b) into an IRA.  

Who can open an IRA?
Anyone with an income, including non-working spouses.  Non-working spouses can open an IRA as long as the married couple files a joint tax return.

When can you start an IRA?
Anytime, the earlier the better.

Where can you go to open an IRA?
Banks, credit unions, brokerage firms.

Ask about...
  • fees
  • support resources (online, by phone)
  • type of investments you can hold in the account & how much access you have to managing each of the holdings
  • trading costs

How should you fund the account?
Do your homework.  

Pick investments that will work best for the level of management that fits your lifestyle.

I like total market index funds because they provide diversity in the portfolio.  Diversity equals less risk.

You can always dump a mutual fund if it does not perform over time, but this is information that you can look up ahead of time before you invest.  There is a ton of information available on every kind of investment out there.
  • Individual stocks—More risk, potential for higher returns & losses.  Pay attention to performance over time & stock market trends.
  • CDs & Treasury bonds—Safe, but low on returns
  • Total market index fund—Mutual funds that consist of several holdings managed by a professional fund manager.  You have access to the fund, but not the holdings within the fund.  Decisions about holdings are made by the fund manager, but you decide on whether or not to keep the fund in your IRA.  Fees depend on each fund.  Fund specs are readily available online.
  • Cash—Safe, but your money is not doing anything by just sitting there.

Brokerage Managed IRAs
ou pay a percentage of the total value of the IRA to have it monitored & managed by a professional account manager.  You have no access to the account itself.  You get reports, but that's it.  

Any fees related to the individual holdings within the IRA (e.g. mutual funds charge fees) are passed on to the account owner.  

If you are hands-off with your investments, then this is a good option, but the costs are higher, and you are leaving all of the management decisions up to the account manager.  So, you'd better have a good one.  

When can you withdraw from an IRA?
  • At 59½ you can begin to take money out of your retirement accounts without penalty.
  • Before 59½  normal withdrawals are subject to a 10% penalty, in addition to fed & state taxes on a Traditional IRA.  
  • Some circumstances may avoid the penalty for early withdrawal (i.e. first-time home purchase, qualified education expenses, death or disability, unreimbursed medical expenses & health insurance for the unemployed)
  • Starting at age 70½, owners of Traditional IRAs are required to begin making withdrawals (Minimum Required Distribution, MRD).  These withdrawals are mandatory and come with stiff penalties if they are not taken.  There is no MRD requirement for Roth IRAs during the lifetime of the owner.
  • A qualified distribution from a Roth IRA is tax-free and penalty-free provided that the 5-year aging requirement has been met and one of the following conditions have been met:  over age 59½; death or disability; qualified first-time home purchase.
  • Non-qualified distributions from a Roth IRA are subject to taxation of earnings and a 10% additional tax unless an exemption applies.
  • Click HERE for more info on Roth IRA withdrawals.  

More good info

learn • invest • wisely

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