It is never too early to begin preparing for your retirement, and one of the best ways to prepare is to set up an Individual Retirement Account (often referred to as an IRA).
Setting up an IRA
The purpose of an IRA is to serve as a personal tax-qualified retirement savings plan. Whether as an employee or self-employed, anyone who works can set aside a set amount in an IRA, with the earnings on these investments tax-deferred until the distribution date. For your kids and adults under the age of 50, they may set aside up to $6,000 or their earned income in that year. Those over the age of 50 are allowed an additional catch-up contribution limit of $7,000 per year. Besides, certain individuals are permitted to deduct all or part of their contributions to the IRA in a Traditional IRA. Plus, as of 1998, certain individuals can also set up Roth IRAs, to which contributions are not deductible but from which withdrawals at retirement will not be taxed.
It does not take much to set up an IRA. The trustee (or custodian) can be a bank, mutual fund, brokerage house, or other financial institution. You cannot be your trustee. An IRA can be established, and a contribution made after year-end, no later than the due date for filing the income tax return for that year, not including extensions. This generally means that you have until April 15th of the following year to contribute and deduct it on your tax return. But several criteria must be met to withdraw funds before age 59 ½ and for information on that, visit https://kgmeyerpc.com/early-distributions-from-an-ira-2/.
IRA Restrictions
The same limit applies even if you have more than one IRA or more than one type of IRA. When both you and your spouse have compensation, you can each contribute the maximum, which means $6,000 each ($7,000 each if you are both 50 or over). In 2021, IRA contribution limits were not raised from the previous year. If your spouse does not have earned income and you do, you can still contribute to the maximum for each of you because you are married.
You do not have to contribute the full amount allowed every year. You may skip a year or even several years. You may resume making contributions in any subsequent year, but you cannot add additional funds to make up for those years when no contribution was made.
Contributions must be from earned wages or compensation. This can be from wages, salaries, commissions, and other sources of earned income. Contributions do not include deferred compensations, retirement payments, or portfolio income from interest or dividends.
You can contribute more than the allowable amount. However, a 6 percent excise tax penalty will be assessed.
No contributions may be made to an inherited IRA, in a form other than cash, or during or after the year when the individual reaches age 72.
It would be best if you began taking distributions from an IRA no later than April 1st of the year following the year in which you reach age 72, or the year in which you retire, whichever is later.
This is a quick and general overview of IRAs. The rules are slightly different for Roth IRAs, which have their contribution and distribution limitations. Before setting up an IRA, take the time to talk to your banker, accountant, or Registered Financial Consultant to ensure you have a firm grasp on your options and set up the IRA that best serves your personal needs.
You can learn more about IRAs online from the Internal Revenue Service here: http://www.irs.gov/taxtopics/tc451.html.
Additional Information
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