An individual retirement account, referred to as an IRA, is a type of retirement savings account that allows you to put funds into the account while you are working, and draw them out again once you have retired. Most types of IRAs allow you to place pre-tax dollars into the account, though taxes will be due at the time the money is withdrawn. The exception to this is a Roth IRA, in which case the money is taxed prior to being placed in the account.
1. Set up an IRA with your employer, if your company offers this option. When your IRA is established this way, your employer will withhold your contribution from your paycheck before taxes are figured, giving you a true pre-tax deposit into your account. If your employer doesn’t offer an IRA, you can also set one up independently.
2. Establish an IRA account with the financial institution of your choice. Many different banks, investing companies and others offer IRAs. Check into the various options, including related charges. Some companies will handle your IRA for little or no cost, while others charge significant fees for their services.
3. Request deposit forms that will allow you to put funds into your IRA. Typically these accounts are set up so that a specified amount is automatically transferred from your checking account into your IRA once a month. Since the financial institution has no way to access your pay prior to taxes being taken out by your employer, this money is not literally taken out before taxes but ends up being treated the same and such funds are still considered as pre-tax contributions.
4. Include your IRA information when you file your taxes. You will receive a statement from the trustee holding your IRA funds. Use the information provided to report to the IRS how much money you placed into your account during the year. Although the money was taxed prior to being placed in the IRA, when you file your income taxes you will be able to deduct the amount of your deposits, so you will receive the same tax savings as if the funds had been removed from your paycheck prior to being contributed to your account.
- Many experts suggest contributing as much as possible to your retirement account. The more you have in it, the more money you should have when you retire. As of publication, the amount you can contribute to an individual IRA is $5,000 annually if you are under age 50 or $6,000 if you are 50 or older.
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