A Quick Guide To Understand Your Current IRA
It is never too early to begin preparing for your retirement and one of the best ways to prepare would be to set up an Individual Retirement Account (usually referred to as an IRA).
It does not take much to set up an IRA. The trustee (or custodian) can be a bank, mutual fund, brokerage house or other monetary institution. You can't be your own trustee.
An IRA can be established and a contribution made after year-end, no later than the deadline for filing the income tax return for that year, not including extensions. This typically means that you have until April 15th of the following year to make the contribution and deduct it on your taxes.
The most you'll be able to contribute to an IRA in any single year (as of 2006) is below $4000 or an amount equal to the compensation included in income for the year. Those fifty years old and above may also be allowed to make additional $1000 catch-up contributions to an Individual Retirement Account each year to help them save more for retirement.
In 2008, IRA contribution limits were raised to $5000, while the catch up contribution for all those 50 years old and above will remain at $1000.
You do not need to contribute the full amount allowed each year. You may skip a year or even several years. You could resume making contributions in any upcoming year, but you cannot add additional funds to make up for those years when no contribution was made.
Contributions must be from compensation. This may be from wages, salaries, commissions along with other sources of earned income. Contributions don't include such things as deferred compensations, retirement payments, or portfolio income from interest or dividends.
It is possible to contribute more than the allowable quantity. Although, a 6 percent excise tax penalty will be assessed.
No contributions can be made to an inherited IRA, in a form other than cash, or during or following the year in which the individual reaches age 70.
This is a fast and general breakdown of IRAs. The rules are slightly different for Roth IRAs, which have their own contribution and distribution limitations.
Before setting up an IRA, take time to talk to your bank, accountant, or financial adviser to make sure you have a good grasp on your alternatives.
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