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IRA Basics

Apr 9

Saving for retirement is must for everyone. It is good for you, your family, your community, your country and the whole universe. Saving for retirement has become a basic necessity in current world. If your work plan offers a 401(k) or any kind of savings plan for retirement, take it, don't think twice. Participating to 401(k) becomes even more important if your employer matches in some fashion to what you contribute, definitely max it out and make sure you are not missing any of that free money. Now not all employers offer 401(k) and that's why the Government has provided some incentives to encourage people to open IRAs to save for their retirement.

IRA stands for Individual Retirement Account. There are three major types of IRAs; Traditional IRAs, ROTH IRAs and SIMPLE IRA Plans.

Traditional IRA is the original concept for an Individual Retirement Account. Contributions to Traditional IRAs may be tax deductible, or nondeductible. Earnings are allowed to accrue to these IRA accounts free from income taxes until withdrawn.

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General requirements are having taxable compensation and have not reached age 70 1/2 by the end of the calendar year. The contribution limits for a Traditional IRA are $5,000 in 2012, or $6,000 with the catch-up contribution that applies to folks age 50 and older.

Contributions to Traditional IRAs are capped at your taxable compensation. Tax deductible contributions are also phased out as income increases. If you're an active participant in a qualified employer plan such as a 401(k), 403(b) or 457, the money you put in Traditional IRA is not tax deductible.

Roth IRA is an excellent option if you qualify. The qualification rules are below:

Those Married and Filing Jointly can contribute a maximum of...

$6,000 if you're over 50 and your combined earned income is $173,000 or less
$5,000 if you're under 50 and your combined earned income is $173,000 or less
$0 regardless of age if your combined earned income is more than $183,000
If your earned income is somewhere between $173,000 and $183,000, your 2012 maximum contribution limit phases out.

Those who are filing as Single or Head of Household can contribute a maximum of...

$6,000 if you're over 50 and your combined earned income is $110,000 or less
$5,000 if you're under 50 and your combined earned income is $110,000 or less
$0 regardless of age if your combined earned income is more than $125,000
If your earned income is somewhere between $110,000 and $125,000, your 2012 maximum contribution limit phases out.

With ROTH IRA, the principal you invest will be on after-tax basis. But the earning on your investment will be tax-free when you withdraw at retirement. This is a huge benefit for most people since one would generally be at a higher tax bracket at retirement.

No matter what your current age is, please take saving for retirement seriously and make it a priority, the earliier you start, better off you will be at retirement. One should start this as soon as he/she is eligible, start with $100 a month if you can't afford more. Think of that as investing on future.

If you are unsure where to start with saving and investing we can help. Many people don't know where to start with their savings priorities and Investment Options. Following a "savings hierarchy" can help you learn where to start saving and investing. You can create a hierarchy that fits your own needs. Here are the steps in the savings hierarchy.

First, contribute as much as your workplace with match to your 401(k), 403(b) or 457 plan. Matched contributions are like "free" money, and you typically get tax-deferred growth and compounding returns. The sooner you start with this the better.

If your employer has a low contribution (less than 50%) and you have high interest rates on your credit card debt (25% or higher), you may want to pay this debt off first.

Second, pay down high-interest credit card debt. If your interest rate is higher than 9%, you should consider using some savings account money to pay down the balance of these accounts, starting with the highest interest rate first. While applying the most money to the highest interest rate card you should be making at least the minimum payments on the other cards to avoid extra penalties. Once one card is paid off, beginning applying extra money to the next highest interest rate. Do this until you are free from all high-interest debt.

Next, contribute the maximum amount to your workplace plan. This is more important than savings low-interest debt or tax-advantaged debt because you will need to save hundreds of thousands of dollars for retirement. Building up your tax-deferred savings early makes sense. Each year you can contribute up to $16,500 to your 401(5) and after 50 you can contribute up to $22,000.

Then, fund an IRA. Once you have maxed out your 401(k) contribution you may consider a Roth IRA or a traditional IRA depending on what you qualify for. The annual limit for contributions is $5,000 a year, or for people over 50$6,000 per year.

Finally start working on other savings goals. Have money transferred each month to a savings account for things like a child's college expenses or a down payment for a home. Make sure you look into tax-advantaged accounts like Coverdell Education Savings Accounts of 529 college savings plans. Learn more about finance and investing.

Article Source: http://www.articlesbase.com/wealth-building-articles/investing-options-with-tax-advantages-2641105.html