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Wednesday, February 2, 2011

How to choose and open an IRA

How to choose and open an IRA
An IRA is an Individual Retirement account that allows individuals to make annual contributions without taxation until the age of 59 . Detailed information on IRA's can be found in the Internal Revenue Services publications 575 and 590. After this age, withdrawals can be made from the IRA without early withdrawal penalty. Several types of IRA's exist, each with different rules and requirements. There are several steps that one can take to effectively establish, contribute to, and benefit from an IRA. This article will present a guideline by which and IRA can be set up.

Decide if an IRA is the right retirement instrument

Since there are several ways to save for retirement and hedge against taxes, a choice exists as to how one should go about planning for retirement and what investment vehicle(s) to choose. Individual Retirement Accounts can be used in conjunction with other retirement instruments but there is an annual limit to the amount an individual can contribute to an IRA. Individual retirement accounts are summarized in this video:

Questions to consider when deciding to open an IRA can include how much excess money one has to contribute, what kind of percentage return on Investment to expect, and if the money deposited into the IRA will be needed before retirement. The answers to these and other questions can help one know whether an IRA is practical, feasible and profitable in terms of one's retirement goals.

Differentiate between types of IRA and determine qualification

When thinking about whether or not an IRA may be a good choice it may be a good idea to become familiar with the various types of IRA, if one qualifies to set up an IRA and what the benefits and advantages of different IRA's are. Some IRA's do not allow any early withdrawals whereas others such as the Roth IRA allow withdrawal of money earned on the original investment without penalty. However, unlike regular IRA's, Roth IRA's are not tax deductible but may qualify for a retirement tax credit.

Additional factors that determine whether or not one qualifies for an IRA include annual income, employment status, tax filing status and pre-existence of an IRA in one's name. Generally, to be able to contribute to an IRA, one's income must not be higher than $116K per year if single or $169K if married. One may also not intend to spend the money in an IRA or be very young in which case a Stretch IRA or Children's IRA may be more practical. Distinguishing and ascertaining which IRA is most suitable, may also be assisted by a representative from the financial institution with which one establishes the IRA.

Select an Employer IRA of financial institution to set up the IRA with

Once one has decided if an IRA is a good choice and become familiar with the terminology, rules and types of IRA, a good next step is to research and contact financial institutions. Many financial institutions have IRA plans with various benefits and drawbacks. Some firms may offer convenience, flexible choice of investments, or favorable interest rates. Additionally, one may want to be sure the financial institutions one establishes and IRA through is also financially sound, reputable and suitable enough to be able to facilitate adjustments and/or rollovers of the IRA if need be.

Depending on the type of IRA one has, one may not require the direct assistance of a financial institution in initially setting up the IRA. In such case one may not have to make any contributions until the employment term ends at which point the IRA can be rolled over to another IRA account with a different organization. What's more, some employer funded IRA's have higher annual contribution amounts which may be part of an overall employment benefits package. Speaking with an employer about the IRA can help one understand whether or not one is able to and/or wants to continue funding the IRA through the employer.

Complete paperwork and sign

Once one has decided, considered and selected if, what type and which organization one wants an IRA with the next step is to read the IRA terms of service, contractual details and application materials. If the all the information is in accordance with one's knowledge, expectations and goals one may then complete the IRA application and/or paperwork to open the account.

This paperwork may also include privacy disclosures, automatic withdrawal and terms of agreement. After completing the paperwork one may then sign and date it and possibly write a check for the initial contribution amount. After this point the information and funds will be processed by the organization with which the IRA is established and the account them becomes active.

Individual retirement accounts may seem like an easy decision on the surface, but there are actually quite a few regulations, rules and variances that govern and differentiate IRA's. The steps outlined in this article can assist with the process of correctly setting up an IRA. Of significant relevance when opening an IRA, is a careful assessment of one's available funds, future cash flow, financial goals and preferences, and qualification status for opening the IRA.

After all is said and done, if one is not happy with the IRA after having set it up, or if one's situation changes, one may simply withdraw all the funds and close the account with penalty if done so before the pre-established age limit or roll over the IRA into another IRA without penalty.