IRA Rules You Need to Know

Know your IRA rules and follow them to make the most of retirement.

Mar 23, 2014 at 12:00PM

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 With a traditional IRA, you contribute pre-tax money and it grows untaxed until withdrawn in retirement, when it's taxed at your income tax rate.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 But the money in your Roth IRA grows untaxed, and when withdrawn in retirement per the rules, it's all tax-free.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

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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.

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