Many Americans depend on to some extent on Social Security to finance their retirement years and to provide their beneficiaries with financial support; however, according to projections made by the Trustees of the Social Security Fund, the fund assets will begin to be depleted by 2024 and are projected to be exhausted in 2037. As a result, it's imperative that individuals find out ways to save for retirement. If you're lucky, you may have an employer-sponsored plan, but you can also supplement your retirement nest egg by funding personal retirement plans such as Individual Retirement Accounts (IRAs). Let's look at some of the features and benefits of IRAs.
In Pictures: 10 Retirement-Wrecking Moves
A Traditional IRA may be funded by an individual who receives taxable compensation during the year and is under the age of 70.5. If you are married and not currently employed, your spouse may fund your Traditional IRA on your behalf, provided you file a joint income-tax return. You may be able to take a deduction on your income tax return for contributions made to your Traditional IRA if you meet certain requirements. The ability to deduct your contribution is usually depends on whether you participate in an employer-sponsored retirement plan, such as a (For information on the deductibility of IRA contributions, see and .)
In addition to funding your Traditional IRA with annual contributions, you may also fund it with assets from your employer-sponsored retirement plan, such as qualified plans, 403(b), 457(b) plans, SEP and SIMPLE IRA plans. Generally, you are allowed to distribute assets from qualified plans, 403(b) and 457(b) plans only if you experience a triggering event. Also, if you inherit retirement assets from your deceased spouse, you may be able to rollover these into your Traditional IRA.
To be sure, consult your employer or plan administrator to determine what the triggering events are for the plan in which you have assets. Your plan administrator should also be able to tell you if the assets are eligible to be rolled over to your Traditional IRA.
The Roth IRA - sometimes referred to as the back-ended IRA because the tax benefits are not received up front like they sometimes are with a Traditional IRA - is similar to a Traditional IRA in many respects. There are, however, also marked differences. Some of these are the following:
Between $112,001 and $127,000 if you are filing your status as single, you are the head of a household, or a qualifying widow or widower or you are married, and filing separate income tax returns and you did not live with your spouse at any time during the year
Contact the Internal Revenue Service for specific details regarding the phased in limits, as they vary based on the exact dollar amount you earned.
If you exceed the income limit, you cannot contribute to a Roth IRA.
You may also fund your Roth IRA with Did Your Roth IRA Conversion Pass or Fail?)
Your annual Traditional and Roth IRA contributions must be made by your tax-filing deadline, which is usually Apr 15 of the following year.
Annual Contribution Limits (Excluding Rollover Contributions):
For 2013, the contribution limit to your Traditional or Roth IRA is the lesser of 100% of earned income or $5,500 for individuals under age 50 as of the end of the year . If you are age 50 or older by the end of the year for which the contribution is being made, you may also contribute an additional $1,000, referred to as a catch-up contribution.
Making the choice between a Traditional and a Roth IRA usually requires the assistance of a tax or financial professional. The factor that you will most consider is the timing of the income tax benefit. With a Traditional IRA, the tax benefit is usually taken when the contribution is made to the IRA. For the Roth IRA, because you cannot take a tax deduction for the contributions made, qualified distributions are tax free. If you are unable to take a deduction for a contribution made to a Traditional IRA, it may make better sense to contribute to a Roth IRA instead. Your financial advisor may even decide that a combination of both is in your best interests. (For more information about choosing between a Roth IRA and a Traditional IRA, see Roth Or Traditional IRA...Which Is The Better Choice?)
Should you decide later that you contributed to the wrong type of account, you can always change your mind and move the contributions to the other type of IRA by means of a recharacterization, providing the recharacterization is completed by your tax filing deadline, including extensions. Should you decide to recharacterize your IRA contribution, you must contact your IRA custodian to determine its documentation and procedural requirements. (For tips on recharacterizing IRA contributions, see Recharacterizing Your IRA Contribution or Roth Conversion.)
IRAs have been the primary source of funding retirement nest eggs for many Americans. In fact, the Investment Company Institute reported that savings in IRAs accounted for 28% of U.S. retirement assets with a balance of $5.4 trillion at the end of 2012. If you are considering adding to your IRA, be sure to consult with your financial advisor, to ensure that your decisions are financially sound. Your financial advisor will help you to choose the IRA that is better suited for your financial profile, and help you to make other important financial decisions.
RetirementIt's not too late to start saving for your retirement, even if you took longer to start thinking about it and doing something about it.
InvestingFinancial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
InvestingSavings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
ProfessionalsAlthough market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
ProfessionalsWomen are typically less prepared for the death of a spouse than men. An advisor can help mitigate some of the financial burdens widows may end up facing.
RetirementRobo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
ProfessionalsThere are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
RetirementTally up the costs associated with taking your retirement in Costa Rica, and determine whether you have what it takes to live in paradise.
RetirementHere's a guide to help you decide where you want to live after retirement.
InvestingNow that singles dominate the population, it's important they understand the essentials of estate planning for indivdiuals.
Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
Your Roth IRA account grows over time thanks to two funding sources: contributions and earnings. While your contributions ... Read Full Answer >>
As long as your retirement funds are held in your 401(k) and you do not take them as distributions, your 401(k) cannot be ... Read Full Answer >>
Whether your IRA can be taken in a lawsuit depends largely on your state of residence and the judgment in question. There ... Read Full Answer >>
Unlike a 401(k) or Individual Retirement Account (IRA), mutual funds are not classified as retirement accounts. Employers ... Read Full Answer >>