The Individual Retirement Arrangement or the IRA is a plan that allows all Americans to save for retirement. It is a personal savings plan which may provide tax advantages on a part of, or your entire contribution to an IRA account. Tax advantage means that you don't have to pay income tax on the wages that you contribute to this account. ...Show details

Additionally, any gain in your account balance is not taxed until you retire and take a withdrawal. IRAs cannot be jointly owned . However, the amount (if any) remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries. There are two different types of IRAs. They include the traditional IRA and Roth IRA.

This year, you can contribute as much as $6,000 if you are under the age of 50 and additional $1,000 if you are 50  or older. This additional contribution is a catch-up provision to allow the people who are 50 or over (but less than 70 1/2) to save more for their retirement. ...Show details

To contribute to a traditional IRA, you must be under the age of 70 1/2 by the end of the tax year. You must also be earning taxable wages in order to contribute to this account. Taxable wages include salaries, commissions, tips, bonuses, or net income from self–employment. If you are not working, but your spouse is, then you may also be able to contribute to this account. Taxable alimony and separate maintenance payments received by an individual are also treated as earnings for IRA purposes.

Withdrawals made prior to the age of 59 1/2 may be subject to a 10% additional early withdrawal penalty. Conversely, you may owe an excise tax if you do not begin to withdraw minimum distributions by April 1st of the year after you reach age 70 1/2. This is called the Required Minimum Distribution (RMD). The penalties for not taking minimum distribution can be very high (50% of RMD).

  • If you have both an IRA account as well as Roth IRA, your combined contribution cannot exceed $6,000 if you are under the age of 50, or additional $1,000 if you are 50 or over $6,000.
  • The time to contribute for a given year is from January 1st of that year to April 15th of the next year. So, between January 1st and April 15th, you can contribute both for the current and previous year, provided you haven't already contributed. ...Show details
  • The amount of tax deductible contribution depends on your tax status, your Modified Adjusted Gross Income (total or gross income - certain allowable above the line deductions), and whether or not you already participate .
  • Unlike a Roth IRA, there is no income limit to contribute to a traditional IRA. A person making millions of dollars a year is also eligible to contribute to a traditional IRA account.
  • Note that if contributions were made with pre-tax dollars, the entire withdrawal during retirement will be taxable at the prevailing income tax rates. If you feel that you may fall in higher income tax rate bracket during retirement or if you feel income tax rates may be higher at that time, you may want to consider Roth IRA.

Full deductibility of a contribution for this year is available to those whose Modified Adjusted Gross Income (MAGI) is $61,000 or less for singles and $98,000 or less for joint filers . Partial deductibility is available for MAGI up to $71,000 for singles and $118,000 for joint filers. Additionally, full deductibility of a contribution is available for working or nonworking spouses (spousal IRA) who are not covered by an employer-sponsored plan whose MAGI is less than $183,000 this year and partial deductibility for MAGI up to $193,000.

Roth IRAs are similar to traditional IRAs. The annual contribution limit is also the same. The biggest difference is the tax treatment of your contribution. Unlike traditional IRA, you can contribute only with after tax dollars to this IRA and make contributions past age 70 1/2. Withdrawals from a Roth IRA during retirement are free from federal taxes (including any gains). Any withdrawals of your contribution prior to retirement are also not taxed, but gains are taxed, and there is also a 10% early withdrawal penalty on the gains. ...Show details

Prior to the retirement age of 59 1/2, withdrawals of $10,000 are allowed without any taxes and penalties for a first time home purchase, if you had the plan for past 5 years. Distributions that are taxable but do not carry 10% penalty are to pay for higher education, medical treatment, and medical insurance during unemployment. The other key difference is that it does not have a required minimum distribution at the age of 70 1/2. The other biggest benefit with a Roth IRA is that your heirs will also get the distribution tax-free. And unlike a traditional IRA, they can stretch the withdrawals across their life expectancies.

With respect to contributions to a Roth IRA, contribution phase out for a single tax filer starts at the income of $116,000 and ends at $131,000. In case of married filing jointly, the contribution phaseout starts at $183,000 and ends at $193,000. These figures represent your modified adjusted gross income Tooltip.

Starting year 2010, there will not be any earnings constraints on converting a an IRA account to Roth. At the time of conversion you will have to pay taxes on pre tax contribution to IRA. Once converted funds in Roth IRA account treated just like regular Roth contributions. Conversion to Roth may be advantageous for those who feel their income level in retirement will be higher than currently so they can take the benefit of relatively lower taxes now. If you lost your job and if your income level was low, converting a traditional or Rollover IRA to Roth may be a good strategy.

It is particularly useful to perform this conversion during a significant market downturn. The idea is, during a down market since your account balance is expected to be low, your tax liability will also be less. After conversion, when the market picks up your earnings will grow Federal tax free. Learn more on Roth Conversion.

  • Open an account for the chosen plan with a reputed financial institution.
  • Contribute money to this account either on a periodic basis or lump sum.
  • Construct a diversified portfolio based on your risk tolerance and time left to retire.
  • In a given year, some funds will do better than expected while others may do worse than expected. As a result, your portfolio allocation may change. In order to bring your portfolio in line with intended allocation, you need to sell a portion of those funds which performed better than expected and buy the ones which did not perform well. This is called rebalancing.