An Individual Retirement Account (IRA) is a savings plan authorized by the federal government and is the best way to plan for your financial future, specifically retirement. Any individual that earns an income, and/or alimony, is eligible to open an IRA: income from other sources do not qualify. Because every individual’s situation is different, there are options when it comes to opening an IRA: traditional or Roth.
A traditional IRA allows tax-deductible contributions. Any individual under the age of 70, or is jointly filing with a spouse, who has earned income may contribute to this type of IRA account. The amount for contribution is solely up to you and do not need to be consecutive; base these allocations as your personal financial budget allows.
Once you reach age 59 and a half, you may withdrawal from the IRA. You will be taxed as soon as the first withdrawal is made. For Traditional IRAs, you must begin making withdrawals by April 1st of the year that you turn the age of 70 and a half. If you should need to pull distributions from your traditional IRA prior to the age of 59 and a half, you may suffer a 10% penalty. However, there are a few circumstances that negate the penalty, such as:
– in the event of death or total disability. – withdrawing nondeductible contributions (these earnings will be taxable). – as a qualified first-time homebuyer, up to $10,000 in your lifetime. This distribution must be used within 120 days to pay costs. This particular circumstance applies to expenses of you, your spouse, child, grandchildren, or ancestor of such individual or spouse. – if the withdrawal is used to pay qualified higher-education expenses. – if you use the withdrawal to pay for medical expenses in excess of 7.5% of your adjusted gross income or to purchase health insurance after 12 weeks+ of receiving unemployment compensation. – if the funds are paid out in a series of payments made over your life expectancy, or a combination of you and your beneficiary.
If you are an active participant in an employer-sponsored retirement plan, your IRA contribution deduction will be based on your adjusted gross income. Those below a set “threshold” may make deductible IRA contributions, and those above that level are not entitled to any IRA deduction.
To speak to a Lancaster Red Rose Credit Union staff member about your IRA options, please contact us by calling 800-995-6685 toll free or by filling out our online form.
Stay tuned for The 411 on IRAs: Part II – Roth IRAs coming in December 2013.