What is an IRA, and why should you care? Let’s start with the basics – IRA stands for “Individual Retirement Account” and its purpose is to help you easily save for your retirement while providing significant tax advantages. More people than ever before are now eligible to benefit from IRAs. When the time comes for retirement, you want the peace of mind knowing that you’ve saved enough to live the lifestyle you want. Remember, it’s never too early to start saving for your financial future!

Do you already have a 401(k)?

If you already contribute to an employer sponsored retirement plan, like a 401(k), you can still contribute to a Roth IRA up to the approved annual limits. An IRA can supplement any plan and can help you save more than you could with just your employer-sponsored plan alone. Consider it added savings for your retirement years.

Know Your Options

Don’t worry – it’s not nearly as confusing as it sounds. Here’s a little breakdown of the three types of IRAs:

Traditional IRA: The main benefit of a traditional IRA is that your contributions may be tax-deductible provided you meet the eligibility requirements. Earnings and tax-deductible contributions are taxed as ordinary income only when they are withdrawn. Anyone earning income and under the age of 70½ is allowed to invest.

Roth IRA: Contributions to Roth IRA accounts are made using after-tax dollars. The benefit of this is that the funds you withdraw in retirement may be free from federal taxes. You will pay no taxes on earnings withdrawn after the age of 59½ and after you’ve had the account for 5 years or more. In 2010, anyone with an adjusted gross income of $120,000 or less ($177,000 or less for joint tax filers) is eligible.

SEP IRA: A Simplified Employee Pension (SEP) IRA is an employer-sponsored retirement plan which is offered to small business owners and their employees. Small business owners can make tax-deductible contributions to the plan. If you are looking for a low-cost and easily maintainable retirement plan for your employees, a SEP IRA is the way to go. You are eligible to contribute at any age if you are self-employed or a small business owner.

Regardless of the type of IRA you choose, the Federal government establishes contribution limits depending on the year and a person’s age. Contribution limits change each year depending upon the level of inflation.

To Convert or Not to Convert, That is the Question

The nice thing about a Roth IRA is the ability to convert your Traditional IRA to a Roth IRA. Even though you would pay taxes that are due on your Traditional IRA when you first convert, the Roth IRA grows tax free and can be withdrawn tax free as well. Starting in 2010 anyone can convert their Traditional IRA into a Roth IRA, regardless of income. When you convert you will have two years to pay taxes in the current year on the full amount of any tax-deductible contributions you made to your Traditional IRA, as well as any tax-deferred gains.

Are there any taxes or penalties for an early distribution from my IRA?

Early distribution from your IRA (before you reach the age of 59 ½) means you must pay a 10% penalty in addition to federal and state taxes on distributions from Traditional IRAs and withdrawals of earnings from Roth IRAs. In some cases Roth IRA contributions can be withdrawn with no penalty, and with others you may be subject to the same 10% penalty. You do not have to pay the additional 10% tax penalty on your early distribution if you qualify for one of the following exceptions:

Direct rollover to your new retirement account

Receipt of a lump-sum payment but money is rolled over to a qualified retirement account within 60 days

Permanent or total disability

You are unemployed and paid for health insurance premiums

Paid for college expenses for yourself or a dependent

Purchase of a home

The payment of medical expenses exceeding 7.5% of your adjusted gross income

The IRS levied your retirement account to pay off tax debts

Learn more at http://www.irs.gov/retirement/

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