The maximum traditional IRA contribution for 2010 is $5,000 or the amount of your taxable earnings, whichever is less, but it's a use-it-or-lose it amount.
No immediate catching up is allowed.
From 2011 this amount will be adjusted for inflation.
Juan Emanuel was in for a nasty surprise when he tried to contribute $8,000 to his IRA last year.
That was more than the IRA maximum permitted.
Juan had been out of work for several months the previous year and so could not contribute as much as he normally did.
In fact, he was $3,000 short of the maximum.
He thought he could make up the difference by contributing that amount over the limit the next year.
He learned differently from his new employer.
If you are at least 50 years old you are able to make an extra catch-up contribution of $1,000 a year.
Juan was pleased to learn about this but he also realized it was better to save as soon as possible and not rely on catching up later in life.
For one thing, those catch-up savings would have less time in which to grow.
Savings can be made monthly and this is more convenient for most people.
After a few months, we get used to being without that money and no longer miss it.
The traditional IRA has a number of significant benefits apart from the obvious one of being able to save for a better retirement.
Among them:
There are a few drawbacks you need to be aware of:
There are two ways your savings can be transferred to your private IRA.
A transfer can be made directly between institutions or you can receive a check that must be deposited within 60 days into your private IRA.
Receiving a check is not the best way to go.
There will be a withholding tax of 20%, meaning that you will have to make up the difference from your own pocket if you can within the 60 days.
If you can't do this, say goodbye to your 20%.
A direct transfer between institutions is by far the best way to go.
But before you do anything, get professional advice.
An IRA can be opened with a broker, discount broker or bank.
Use a broker or discount broker if you plan to invest in stocks or bonds.
If you don't need investment advice, you will save a good deal of money with a discount broker.
No immediate catching up is allowed.
From 2011 this amount will be adjusted for inflation.
Juan Emanuel was in for a nasty surprise when he tried to contribute $8,000 to his IRA last year.
That was more than the IRA maximum permitted.
Juan had been out of work for several months the previous year and so could not contribute as much as he normally did.
In fact, he was $3,000 short of the maximum.
He thought he could make up the difference by contributing that amount over the limit the next year.
He learned differently from his new employer.
If you are at least 50 years old you are able to make an extra catch-up contribution of $1,000 a year.
Juan was pleased to learn about this but he also realized it was better to save as soon as possible and not rely on catching up later in life.
For one thing, those catch-up savings would have less time in which to grow.
Savings can be made monthly and this is more convenient for most people.
After a few months, we get used to being without that money and no longer miss it.
The traditional IRA has a number of significant benefits apart from the obvious one of being able to save for a better retirement.
Among them:
- You can deduct the amount you save from taxes
- At least until you start to spend the money the government in essence is lending you a portion of your investment interest free
- You can invest in a wide variety of investments, including stocks and bonds
There are a few drawbacks you need to be aware of:
- With a few exceptions, if you need the money before age 59 1/2 you will pay a 10% penalty along with the income tax everyone pays no matter when they withdraw
- The entire amount must be withdrawn by age 70
There are two ways your savings can be transferred to your private IRA.
A transfer can be made directly between institutions or you can receive a check that must be deposited within 60 days into your private IRA.
Receiving a check is not the best way to go.
There will be a withholding tax of 20%, meaning that you will have to make up the difference from your own pocket if you can within the 60 days.
If you can't do this, say goodbye to your 20%.
A direct transfer between institutions is by far the best way to go.
But before you do anything, get professional advice.
An IRA can be opened with a broker, discount broker or bank.
Use a broker or discount broker if you plan to invest in stocks or bonds.
If you don't need investment advice, you will save a good deal of money with a discount broker.
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