5 IRA Rules You Need To Know

The IRA rules are important to know for anyone thinking about taking control of their financial future.

May 31, 2014 at 1:00PM

A survey by TIAA-CREF found that less than one-fourth of Americans have an IRA account, and less than half of those who do take advantage of the full contribution limit. The same study also found that many people, especially younger adults, are completely unaware of what an IRA account really is or how it works.

There are two main types of IRAs, traditional and Roth, and although they have some significant differences -- mainly in their tax treatment -- there are a few universal rules that apply to any IRA. Here are five big ones that will greatly improve your understanding and help you make solid decisions about your own financial future.

1. You can get started with a dollar
Most major brokerages do not demand a minimum amount of money to open a new IRA, whereas regular brokerage accounts can require an initial deposit of $2,000 or more. You can literally open an IRA with a dollar.

While this isn't very practical, the point here is that you can't use the "I don't have enough money to invest" excuse. I opened my first IRA with $50 and bought two shares of Intel. You'd be amazed how $50 here and there can accumulate over time.

2. Maxing out your IRA
Both types of IRAs have the same maximum annual contribution, which is the lesser of $5,500 or 100% of your earned income. So if you are in school and earn $3,000 per year in a part-time job, that's the maximum you can put in an IRA.

If you're age 50 or older, you can make an additional "catch-up" contribution of $1,000 for a total of $6,500. This is intended to help those who may have waited a little longer than they should have to started investing in an IRA.

It is important to note that the limit applies to all of your IRA accounts combined. For example, you can contribute $2,000 into a traditional IRA and $3,500 into a Roth, but not $5,500 into each.

3. The tax benefits are excellent, if you qualify
While everyone can contribute to an IRA in one way or another, to qualify for the best tax treatment, your income cannot exceed certain limits.

To make a full contribution to a Roth IRA, you must earn less than $114,000 per year in 2014 as a single filer or $181,000 if you're married filing jointly. Eligibility to contribute phases out entirely for those with incomes above $129,000, or $191,000 for married taxpayers.

Unlike the Roth IRA, anyone can contribute to a traditional IRA and let their investments grow tax-deferred. However, if you are covered by a retirement plan at work, your modified adjusted gross income must be below $60,000 if you're single or $96,000 if you're married in order to qualify for a full deduction, and the ability to deduct contributions phases out entirely above incomes of $70,000 for singles and $116,000 for married taxpayers. If only one spouse is covered at work, the limit rises to $173,000. If you are not covered, there is no income limit to deduct your contributions.

4. How to withdraw your money
Generally, you can't withdraw your money penalty-free from a traditional IRA until you are 59 and a half years old without incurring a 10% early-withdrawal penalty. There are, however, a few exceptions. For instance, if you're purchasing your first home, you may be able to withdraw money without penalty to help with the down payment. Education expenses or medical expenses may also qualify. Also, if you become disabled or deceased, your money can be withdrawn without penalty.

Meanwhile, a Roth IRA allows you to withdraw contributions (but not gains) at any time, and for any reason, without penalty. You also are not required to withdraw money from a Roth IRA at all if you don't need it, which makes the Roth a good choice if you might just leave your money for your heirs to inherit. Traditional IRAs, on the other hand, require you to begin taking distributions by the time you reach 70 and a half years of age.

5. What you can invest in
An IRA is somewhat similar to a 401(k) plan in that your investments grow tax-free. However, one major difference is the types of investments you can make.

With a 401(k), your plan administrator generally gives you a selection of funds to choose from. In an IRA, you are free to invest in stocks, bonds, mutual funds, CDs, and ETFs. While many IRA investors still choose to keep their portfolio relatively simple by investing in index funds and other low-maintenance investments, an IRA puts you in control of your own retirement money in a way most 401(k) plans don't.

Top dividend stocks for your IRA
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information