What is an IRA? Rules and Benefits
Here’s what you need to know:
- An IRA is an individual retirement arrangement that allows you to save money for retirement
- Earnings on IRA contributions are not taxed as they accumulate
- There are two types of IRAs – the Roth and the Traditional
- The Traditional IRA allows you to deduct your contribution from your taxes now and pay taxes on your distributions later
- The Roth IRA is a special IRA where you pay taxes on your contributions now and your distributions are tax-free
How can I open an IRA?
All you have to do to open an IRA is reach out to your bank, investment firm, or other financial advisor. You can discuss the best option, how much you have to put in to start your IRA, and the institutional requirements to maintain your IRA.
How long can I contribute to my IRA?
You must have been working, either for someone or as a self-employed taxpayer, and have earned income to make a contribution to any type of IRA. You cannot contribute to your traditional IRA once you reach age 70 ½, even if you are still working. You may continue to make contributions to a Roth IRA as long as you are working.
When can I start taking money out of my IRA?
You can withdraw money from your IRA at any time, however there can be a penalty if you withdraw the money prior to age 59 ½. Once you reach age 59 ½, you can start taking distributions from your IRA without any penalty. If you have traditional IRAs you must start taking distributions by age 70 ½. There is no required age to start taking distributions from your Roth IRAs.
Are there penalties for withdrawing money early?
There is a 10% additional tax on withdrawals prior to age 59 ½ from either type of IRA and distributions from a Roth IRA prior to the fifth year of the account.
Can I combine my pension plan with my IRA?
You can rollover your retirement plan or your pension into an IRA once you leave the company providing the plan. This allows you to gain control over your own investments and for those in a pension plan, it allows you to control how much money you want to withdraw and when you’d like to do it.
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