IRA Basics: Taxes, Benefits and Ways to Fund


Your Individual Retirement Account (IRA) is one of the main components of a financially secure retirement. Anyone under the age of 70½ with wages can contribute and start taking advantage of the increasing annual contribution limits and tax benefits.

Not only may you earn a tax deduction for contributing to an IRA, but the earlier you open one the greater your chances of having a larger nest egg when you retire. Contributions cannot exceed $5,500, and if you are at least age 50, you may contribute an additional $1,000.

Roth-IRA-webTaxes

Extensions for filing your taxes do not apply to your IRA contributions, which means you must contribute before the tax filing due date, which is usually April 15. Depending on what type of IRA you have, your participation in an employer-sponsored program and your income, you may be able to deduct your IRA contributions on your tax return. However, any contributions to a Roth IRA are not tax-deductible since you are already paying taxes on the money before contributing it to a retirement fund, but your earnings may be tax free when certain conditions are met. Traditional IRA contributions are often tax deductible, but since everyone’s tax situation is different you may want to discuss your situation with a qualified tax advisor to learn how the rules may apply to you.

Benefits

The amount you can accumulate depends on two factors – how much you contribute and how much the funds grow within the account. Of course, the more contributions you make and the higher the earnings rate, the more you will accumulate. No one can control or accurately predict what will happen with interest rates or the stock market, but you get to control how much and how often you contribute.

Ways to Fund

The keys to a successful retirement fund are to start early and contribute every year. Waiting just one year or missing a year can cost you plenty. Using an automatic savings plan will also help make it easy to stay on track. If you are under the age of 50 and start in January, you can make your full contribution with only $458 each month. If you are 50 or older, it only takes $541 each month.

There is no easier way to save than with an automatic savings plan. If you are already using direct deposit for paychecks, you can have your financial institution transfer the amount each month. Contact your financial institution for an Automatic Transfer Authorization form to help you enroll. You can also have your employer deduct the amount each month and deposit it into the account of your choice. Ask your employer’s Human Resources or Payroll department for a Payroll Deduction Direct Deposit form to get started. This form will also help you begin direct deposit of your paycheck, if you are not already enrolled.

 

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