Save for Retirement with an Investment Retirement Account (IRA)

blr-editor | May 14, 2011 | Comments View Comments

An IRA can make retirement easier

An Investment Retirement Account (IRA) is a major vehicle millions use to save for their retirement. An IRA may consist of a mix of stocks, bonds or mutual funds. Contributions to an IRA are tax-deductible, based on income.

There are 3 kinds of IRAs: Traditional, Roth or SIMPLE IRAs.

Eligibility for Traditional IRAs
There are two eligibility rules that apply to traditional IRAs. The first is that you must be under age 70 1/2 at the end of the calendar year to participate. The second states that you must have some form of compensation to contribute to a traditional IRA. Compensation can be wages, salaries, bonuses, and commissions.

Eligibility for the Roth IRA
Roth IRA qualifying rules are less stringent than a traditional IRA. To contribute to a Roth, all you need is some form of compensation. There is no age limit or restriction for a Roth IRA.

Eligibility for the SIMPLE IRA
To participate in a SIMPLE IRA, your employer must offer the plan to its employees. The employer must have 100 or fewer employees who received $5,000 or more in compensation in the prior year. The second rule is that the employer cannot offer another qualified plan, such as a 401k plan. So a SIMPLE IRA is best viewed as a retirement solution for small businesses.

Employees wishing to participate in their employer’s SIMPLE IRA plan must have received at least $5,000 in compensation in the past two years and they are expected to be paid at least $5,000 in the current year.

Contributions
In 2011, the maximum you may contribute towards an IRA is $5,000 if you are under 50 years old and $6,000 if you are over 50 years old by the end of 2011. In both cases, you must earn more than those amounts otherwise your maximum contributions will be your earnings.

For 2011, if you are covered by a 401K or 403B at work, your limits are:

Singles and Heads of Household: Below $56,000 salary for a full tax deduction and no tax deduction above $66,000
Married filing jointly: Below $90,000 salary for a full tax deduction and no tax deduction above $110,000

If you are not covered by a 401K or 403B at work (singles or both spouses), there are no limits.

IRA Distributions must begin at age 70½ and the payout is based on life expectancy.