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.
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 With a traditional IRA, you contribute pre-tax money and it grows untaxed until withdrawn in retirement, when it's taxed at your income tax rate.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 But the money in your Roth IRA grows untaxed, and when withdrawn in retirement per the rules, it's all tax-free.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.
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