Top 10 IRA Basics You Need to Know

IRA Secrets and How to Make the Most of Your Retirement Earnings

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An individual retirement account, or IRA, can be one of the best investments in your future. However, there are many misunderstandings about what IRAs are, how they work, and how to make the most of this employee benefit. Anyone over the age of 18 can open an IRA account through their employer or their bank. It is an option they gives all Americans a chance to put away earnings to be used during their golden years of retirement.

An IRA is not meant to replace, but rather to augment any other types of retirement investments and benefits that working adults will receive once they reach retirement age.

10 Things to Learn About IRAs

How much do you know about IRAs? Maybe you are new to the concept or you have heard plenty of myths about how they work. Here are the top 10 IRA basics you need to know to be a smart investor.

1. Get Started Today

Studies have shown that people often wait until they're in their mid 30s and 40s before they start taking retirement savings seriously. According to a 2017 study conducted by Merrill Lynch and Age Wave, one-third of all adults (aged 25 and above) have no retirement savings put aside, and 23 percent have less than $10,000 put away for the future. An overwhelming 81 percent don't even know how much money they will need to retire. This is scary considering that some analysts believe that the present day Social Security benefits will be depleted by the year 2034.

The time is now to start putting a portion of your earnings into an IRA. Put as much as possible into your IRA in order to have the funds available by the time you retire.

2. There Are Annual Limits on Contributions

The Internal Revenue Service (IRS) puts a cap on annual contributions, so please review this carefully with your financial planner.

For tax year 2017, the plan limits for a traditional IRA for an individual is $5,500 with an extra catch up allowance of $1,000 for anyone over the age of 50. Want to maximize your tax savings? Consider contributing at least an additional $3,500 to your health savings account as well. If you have both a workplace retirement savings account and a personal IRA, the combined contributions cannot exceed the IRS approved amounts. 

3. There Are Different Types of IRAs

Just because your employer offers one type of IRA doesn't mean that you are limited to this choice. In fact, there are a number of different types of IRA plans to choose from. The most common types of IRAs are traditional and Roth. In addition there are plans that are fully funded by employees, fully funded by employers, or a combination of each. Most employers offer IRAs that are funded by employees and then dollars are matched by the company. These are the most preferable IRAs. However, companies may also choose to require employees to self fund IRA plans and only offer extra money at the end of the year through an SEP or profit sharing program. Self employed individuals may also choose an SEP IRA or a SIMPLE IRA to start saving earnings for retirement, so its not limited to just those with traditional jobs.

 

4. It’s Possible to Contribute to an IRA for a Legal Spouse

One often overlooked factor is that a married person may also contribute the maximum annual funds into an IRA account for his or her spouse. Its called a spousal IRA. The spouse does not have to be employed. This option can basically double the retirement earnings of a married couple. For example, a couple over the age of 50 could easily put away $13,000 extra per year using this method. 

5. Individuals Can Extend Their Investment Time

Another great feature of IRAs is the ability to continue to invest funds after December 31 of each year. In fact, many people contribute additional money to their IRA to reduce their tax base by April 15th. This means if you owe taxes at the end of 2017, you can choose to invest this amount into your IRA and avoid paying the tax penalties.

Keep in mind that if you have borrowed money against your IRA you will still be taxed local and state fees because this is considered income.

6. Instead of Cashing Out; Roll Over

No we are not talking about a dog here. If you leave an employer with a retirement fund of any type you will be given the choice to either cash it out or to roll it over to a 401(k) or IRA. It is always preferable to roll your funds over directly to your retirement account with your new employer for your bank. If you cash out your funds, you can expect to pay at least 30 percent in administrative fees and taxes. Depending on what state you live in you may also be taxed an additional 10 percent at the end of the year. Rolling over your funds does not make them unavailable to you, but it helps you to retain more of your money.

7. Uncle Sam Will (Eventually) Make You Use Your IRA

It's interesting to consider, but the IRS Will make all individuals over the age of 70 1/2 utilize their IRA funds. They cannot continue to earn or accrue after this age. It is possible to start with drawing Social Security retirement funds at the age of 62 and continue to work part time and contribute to an IRA until the age of 70 1/2. This short period can help anyone to make up lost income earning potential, but it is very brief. It is far better to have a plan how the IRA will be invested at retirement age. For example, someone anticipating retirement at the age of 62 may want to start looking at investing in property or another type of transferable wealth — to be left as an inheritance.

8. IRA beneficiaries Have Different Rules

When it comes to beneficiaries there are two separate rules. Spousal beneficiaries are entitled to the full amount of the IRA less 10 percent penalty for early withdrawal (if they are under age 59 1/2). When they reach the age of 65 this penalty drops to zero. Non-spousal the fisheries are not issued the 10 percent penalty. This is something to take into consideration when choosing an IRA plan. If something were to happen to you do you have a plan for your spouse to continue on at your current income level?

9. Automatic Enrollments Aren't Always in Your Favor

Is a growing trend by employers to increase participation in retirement funds by requiring automatic enrollment. It may seem easy but there are some risks if you're not paying attention. Your money could be put into a target date fund which actually increases the risk. You may also assume that the percentage of salary you signed up for is enough to provide for your retirement. Both of these scenarios Will not serve you. Read through the plan documents carefully before enrolling, and remember that you always have the option to opt out.

10. An IRA Can Protect You From Debt Collectors

If you are in serious debt and considering bankruptcy, putting money into an IRA first can protect your assets during this period. Most people don't realize that the government excludes up to $1 million of funds held in an approved IRA. You do not have to worry that the creditors will come knocking and take your hard earned retirement money. It's always a good idea to get out of debt however, so that you can enjoy your retirement fully.