Elder Law

The IRA: A Useful Retirement Savings Tool

America is facing a “retirement savings crisis.” Among working-age Americans, 45 percent have saved no money at all for retirement. This includes nearly a third of those between the ages of 55 and 64. Among those with some savings, 75 percent have less than $30,000.

One way to avert your own savings crisis and ensure a comfortable retirement is with an Individual Retirement Account.

What Is an Individual Retirement Account?

IRAs were created by the federal government as a way of encouraging Americans to save for retirement. To do so, they offer considerable tax advantages. Whereas 401(k) retirement plans are provided by your employer, the most common types of IRAs are accounts that you open and fund on your own.

An IRA is a basket in which an investor can keep stocks, bonds, mutual funds and other assets. They are offered by large financial institutions, including banks, mutual fund companies and brokerage firms. There are a number of different types, each with its own tax implications and eligibility requirements.

IRAs Opened by Individuals

In a traditional IRA, you can deduct contributions to the account from your taxable income for income tax purposes. The money is taxed as ordinary income when it is withdrawn in retirement. In the meantime, the savings grow tax-deferred. You may begin withdrawing the money (without penalty) when you are age 59.5. You must begin withdrawing it by the time you reach age 70.5. There are also non-deductible versions that are taxed less upon distribution.

In a Roth IRA, there is no up-front deduction for your contribution, but your savings grow tax-free and eventual distributions are usually tax-free. There is no requirement to withdraw by age 70.5.

Limits on Contributions

In 2013, the maximum contribution to traditional and Roth IRAs is $5,500. If you are age 50 or older, you can contribute an additional “catch-up” contribution of $1,000. Allowable IRA contributions are limited by annual qualifying income (wages, self-employment income, alimony and non-taxable combat pay).

Penalties for Early Withdrawal

IRAs offer significant tax benefits to encourage us to save for retirement. As a result, the government imposes penalties on those who withdraw the money early.

If you withdraw your money from a traditional IRA before age 59.9, you will be taxed on the ordinary income, plus an additional 10 percent. There are exceptions when money is withdrawn for college or medical expenses, a first-time home purchase or expenses associated with a sudden disability.

With a Roth IRA, you can withdraw contributions (but not earnings) at any time without penalty.

IRAs Opened by Businesses

A Simplified Employee Pension (SEP) plan allows employers to contribute to traditional IRAs set up for employees. SEP plans are especially popular among the self-employed.

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is similar in many ways to a 401(k) plan, but features lower contribution limits and simpler, less costly administration. It requires that an employer match employee contributions.

Call an Estate Planning or Tax Lawyer

The issues surrounding IRAs can be complicated. Since they are opened by individuals rather than employers, there is less professional oversight. Plus, the facts of each case and the laws in each state are unique. This article provides a brief, general introduction to the topic. It is not legal advice. For more detailed, specific information about your specific needs, please contact an estate planning or tax lawyer.

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