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Individual Retirement Accounts –by Marianela del Pino-RiveraHello, my name is Marianela Del Pino-Rivera and I am a Certified Public Accountant. I am a small business owner in Prince George’s County, Maryland and primarily work with individuals and businesses to prepare tax information and provide bookkeeping services. I am the current secretary/treasurer of the Maryland Association of CPAs.I have worked in the financial arena for more than 25 years and have experience in working with nearly every aspect of financial life including, accounting and taxation, IRS problem resolution, estates and trusts, business formation, financial planning and international tax matters.Today, I am going to speak with you about IRAs or Individual Retirement Accounts. But, before I do so, let’s first talk about the importance of saving for retirement. Most people grossly underestimate the cost of retirement. It is important to remember that we are all living longer and as a result will likely need about 70% of our pre-retirement income to finance retirement. Please note that Social Security generally covers 30 to 40%, which means that more than half of your retirement will need to come from other sources.It is important that every individual start saving for retirement early and take advantage of retirement options provided by the employer.I also highly recommend that every person invest the maximum allowed in an IRA…and do it every year.Here’s the proof of what a difference starting early can make. A $3,000 annual investment started at age 25 in a tax-deferred account (such as an IRA) and earning 8% annual return will become $777,000 by age 65. If that individual waited until age 35 to start the investment then the nest egg would only total $340,000. The $30,000 NOT invested during those 10 years could cost you $437,000!So, now that I have your attention, let’s dig into the basic facts of an IRA:An IRA or Individual Retirement Account is an account that an individual opens at a bank or investment house that is used for retirement.It is funded like a traditional investment, meaning the individual puts money into the account and purchases things like CDs, mutual funds, stocks, bonds, etc.;The main types of IRAs are Traditional IRAs and Roth IRAs and the biggest difference between the two has to do with taxes;In a traditional IRA, the money the individual contributes into the account can generally be claimed as a tax deduction. Taxes are paid on the money which is withdrawn from the account at whatever the tax rate is at that time, generally during retirement.Contributions to a Roth IRA do not create a tax deduction when the individual puts the money into the account. However, all earnings and principal on the account can be taken out tax free – provided the IRS rules and regulations are met.In order to contribute to a traditional or Roth IRA you need to have earned income of at least as much as what you are contributing – income from investments or real estate does not count.For 2012, you can contribute up to $5,000 to your IRA (either IRA), and up to $6,000 if you’re 50 or over. The contribution must be made by April 15, 2013Specifics of a Traditional IRA If you (and your spouse) are not covered by a separate pension plan then the contribution to an IRA is deductible on your tax return.If you or your spouse are covered by a separate pension plan, then the contribution is only fully deductible if your income is below IRS income limitsDistributions or withdraws from the Traditional IRA are taxable, and if taken out before age 59 ? they are also subject to 10% penalty. My advice would be to not withdraw funds from an IRA early. Some exceptions to the 10% penalty exist such as death, disability, education, first home, etc.Traditional IRA distributions cannot be deferred indefinitely, they must begin at age 70 ? if not previously taken.Should the owner of the IRA pass away, the account will transfer to the beneficiaries. If a spouse inherits the account, the funds can be rolled over into their own IRA. If others inherit the account, they will need to take distributions according to IRS options. A rollover is not allowed other than to the spouse. All distributions are taxable to the beneficiaries.Specifics of Roth IRAFunds contributed to a Roth IRA are not deductible on the tax return, however the amounts withdrawn are not taxable, provided the owner has had the account for at least 5 years and is at least age 59 ?.The Roth IRA is only fully available to people if their incomes are below $110,000 (if single) and $173,000 (if married filing jointly) for 2012. Funds can be contributed even if the owner is covered by another retirement plan or pension.No obligatory withdrawal required at any ageUpon death of the owner, the account will transfer to the beneficiaries. If the owner met the 5 year test prior to death, then the distributions or withdraws are not taxable to the beneficiaries.So what is the main attraction of the IRA account? It allows the owners’ money to grow without having to pay taxes on the income earned. Normally, an investor would pay tax on all interest, dividends and capital gains earned by their investments. Let’s look at two examples. Using an IRA, a 25 year old person contributes $5,000 each year until he/she retires and earns an investment return of 8%. After 40 years that individual would have $1.4 million saved at age 65.If that same 25 year old person invested $5,000 per year in a taxable account earning the same 8% return, he/she would have only about $1 million after 40 years since they would owe taxes every year on the annual earnings, at about 15% in this example. This means that because they have to pay taxes each year on the earnings, there is less left to be invested and to continue to grow. Further, if he/she owes state taxes on the money, then they would have even less left at the end of the 40 years.So contribute to your IRA account! Determine if you qualify for one or both, and talk to your tax advisor to see which is best for you. Let the power of compounding and tax deferral work for you. And, most important starting saving now!! ................
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