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Traditional IRAsOverview401k and SEP IRAs are great tools to help you save for retirement…if your employer offers them. What happens if your employer doesn’t offer a retirement plan? Does that mean you can’t take advantage of the tax benefits of a retirement account?No! You can always set up an Individual Retirement Account, or IRA. There are two types of IRA – Traditional and Roth. Roth IRAs are a more recent creation, and we’ll talk about them in the next chapter. With a traditional IRA, you set up an investment account and designate it as an IRA. You can invest the money in almost anything you choose – mutual funds, index funds, individually selected stocks and bonds, money market funds, real estate, etc. Contributions are tax-deductible, and the money grows tax-deferred. You only pay taxes at retirement.Rollovers and TransfersSuppose you have a 401k at an employer, and you change jobs. At many companies, this triggers a distribution. (Companies don’t want the record-keeping headaches for a person who doesn’t work there anymore.) But you’re nowhere near 59 ?, and you don’t want to pay a tax penalty. You have 90 days from distribution to reinvest the money in a different retirement account without paying taxes or penalties. This is called a rollover. This can be a 401k or other employer-sponsored plan at your new job, or it can be an IRA. Often, employer-sponsored plans don’t accept rollovers, so an IRA may be your only option to avoid the tax penalty.Another situation might be that you already have an IRA, but you want to move your investments to a different company. Moving money from one IRA to another is called a transfer. Again, you have 90 days to complete the transfer without paying taxes or penalties.EligibilityYou must have compensation (any amount) and not reach 70 ? by the end of the year.ContributionsContributions are tax-deductible in the year you make them. You can contribute up to 100% of compensation, up to $5,500. You can also contribute up to $5,500 to your spouse’s IRA. However, it’s important to know that this is an Individual retirement account. While you can contribute to your spouse’s IRA, it’s always an individual account for the benefit of the account owner (in this case, your spouse). There is no such thing as a joint IRA.DistributionsIn general, distributions before age 59 ? are subject to the 10% penalty. Exceptions include:Unreimbursed medical expensesMedical insurance premiums if unemployedDeathDisabilityPurchase a first homeHigher education expensesIRA distributions are taxable at distribution, depending on the individual’s tax bracket at the time of distribution.You must take required minimum distributions (RMDs) by age 70 ?. Failure to take RMDs results in a 50% penalty.QuestionsIn what can you invest your traditional IRA?How many days you do have to complete a rollover or transfer?What are the eligibility requirements for a traditional IRA?What is the contribution limit for a traditional IRA?What is retirement age for a traditional IRA?What are 3 exceptions to the 10% early distribution penalty for a traditional IRA?When is a traditional IRA taxed?What is the penalty for failing to take RMDs? ................
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