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IRA Rules You Need to Know

As you plan and prepare for your retirement, don't neglect IRAs, as they can be powerful wealth-boosters. Learn important IRA rules, too, to maximize your gains and minimize headaches. Here are some key rules to know.


Source: Flickr user Keith Ramsey.

IRAs help you save for retirement by giving you some tax advantages. With a traditional IRA, you contribute pre-tax money and it grows untaxed until withdrawn in retirement, when it's taxed at your income tax rate. So if your taxable income is $50,000 and you contribute $5,000 to an IRA, your taxable income drops to $45,000. Thus you're sheltering $5,000 from taxes for now, saving $1,250 if it would have been taxed at 25%. You also benefit if you're in a high tax bracket now but will be in a lower one come retirement. Roth IRA rules have you contributing post-tax funds, so that you get no immediate tax benefit. But the money in your Roth IRA grows untaxed, and when withdrawn in retirement per the rules, it's all tax-free. Thus, if you grow a huge nest egg in your Roth IRA, perhaps amassing $300,000, the Roth IRA rules will let you keep it all, with nothing more going to Uncle Sam. Nice, huh?

The IRS increases IRA contribution limits to keep up with inflation. This year, most of us can contribute up to $5,500 of earned income to an IRA. Those 50 or older get to add a $1,000 "catch-up" sum to that limit for a total of $6,500. IRA rules feature no minimum sum that you have to contribute to your IRA. Thus you can set up an IRA account at many good brokerages or financial institutions with very little money (though, of course, it's smart to try to contribute the maximum).

IRA rules also include this not-too-well-known tidbit: Your contribution to an IRA each year doesn't have to go into one single IRA account. You might, for example, contribute to both a traditional IRA and a Roth IRA, so long as the sums you contribute don't exceed your contribution limit.

Meanwhile, IRA rules also limit some contributions. All contributions need to be made with earned income, so inherited funds won't work, nor can kids open IRAs with birthday money. (Babysitting money is earned, though!) Anyone younger than 70-1/2 can contribute to a traditional IRA, but the Roth IRA rules impose some income restrictions. Single filers, for example, can make the maximum contribution if their income is less than $114,000, but they cannot make a contribution if they earn more than $129,000. Incomes in between result in lower contribution limits. Married folks filing jointly can make full Roth contributions if their total income is below $181,000. (There are also some IRA rules that limit the deductibility of your contributions if you have a qualified retirement plan available to you at work.)

There are other kinds of IRAs, such as SEP IRAs and SIMPLE IRAs, which are handy for self-employed folks and those who work for small companies without 401(k) plans or the like. Contributions to these two IRAs can be made in addition to the contributions that you can make to traditional or Roth IRAs. (Thus, for example, a self-employed person might max out her Roth IRA contribution and also make a contribution to a SEP IRA in the same year.)

Spend a little time learning more about IRA rules, and your retirement may well be richer. There are rules, for example, relating to how beneficiaries are treated, how early you can withdraw IRA money, and how to convert one kind of IRA to another.

Once you have an IRA, be smart about how you invest the money in it. The best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.


Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2014, at 7:40 AM, jbregit wrote:

    One correction to the article. If an individual is an active participant in a qualified retirement plan, then a regular IRA also has an earnings restriction, like the Roth. The limits are different than a Roth.

  • Report this Comment On March 25, 2014, at 9:52 AM, ScutFerkus wrote:

    Anyone can convert a traditional to a Roth regardless of income. So you can contribute to a non deductible traditional and convert it to a Roth the very next day- it's called a "back door Roth" and the author should have mentioned it.

  • Report this Comment On March 27, 2014, at 4:36 PM, GrannyLee wrote:

    I already have a Roth with TDAmeritrade and have had it for years. I opened a new self-directed Roth this year in anticipation of making some significant money in a sole proprietorship. Things did not work out as well as expected and I ended up with a loss for the year. So now I face a penalty for over-contributing (I am 67, husband is 73, and our income is Social security, a pension, and rental property so while we have income, it is not "EARNED" income). I really don't want to withdraw the money from the self-directed Roth as the money has been invested and not easily negotiable. Can I, instead, cash out my first Roth and use those funds to partially "pay back" what was invested? What happens if my business succeeds next year? Or my investments grow?

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Selena Maranjian
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Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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