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Guidelines for Using Individual Retirement Accounts (IRAs)

Individual retirement account or IRA is a type of savings account that provides tax breaks on retirement savings. Hence, it's a great option for individuals who want to stock away assets for retirement. Contrary to what most people believe, however, IRA is not an investment platform. Rather, it is a retirement account. What makes IRA an attractive option over other retirement accounts is that taxes are either deferred until you withdraw the money or are totally free.  

Opening an IRA Account: Are You Eligible?  

While 401(K)s are employer-sponsored, IRAs can be opened by small business owners and self-employed individuals on their own. However, not everyone is eligible for an IRA. There are certain requirements to be met.

Traditional IRA. If you’re less than 70 ½ year old by the end of the calendar year, then you may be eligible for a traditional IRA. You must also have some sort of compensation (e.g. salary, bonus, commissions, etc.) to qualify. There are limits as well on how much you can contribute each year based on income, employment status, and age. The standard limit is $5000 (as of 2011 and 2012) for applicants aged 50 and below. An additional catch-up contribution of $1000 is required for applications aged 50 and up. Employed individuals who already have a company-sponsored retirement plan can also contribute to traditional IRA, although they are subject to more kinds of limitations. 

Roth IRA. This type of IRA is more lax than traditional IRA. There are no age restrictions for applicants, and withdrawals are typically tax-free. Rules of contribution are similar to traditional IRA.

SIMPLE IRA. SIMPLE is acronym for Savings Incentive Match Plan for Employees. This just means that your employer will match any contribution you contribute to your IRA. SIMPLE IRA is offered to small businesses with 100 employees or less. To be eligible for SIMPLE IRA, the employee must have received $5000 or more in compensation the previous year. You must not be holding other qualified plans (e.g. 401k) as well.  

When to Withdraw IRA 

IRA is a great way to save for your retirement. However, if you take out your specified retirement age – 59 ½ for most people -- a 10% penalty will be deducted from the amount you withdraw. If you want to avoid 10% penalty on early withdrawal, don’t withdraw your funds before you turn 60. Another way to avoid the 10 percent penalty? Use the money to buy a house, invest in private equity, or cover higher education costs.




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