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Monday, March 21, 2011

How to open an individual retirement account

Opening an Individual Retirement Account is a retirement planning decision. Depending on whether or not your IRA is a traditional, Roth or Simple IRA, opening an IRA can be subject to specific differences in regulation. To open a traditional or Roth IRA for a specific year usually requires  an application, IRA disclosure terms,  an initial deposit, and 4) funding before the annual April, 15th tax deadline.

Where to find an IRA

IRAs are opened through IRS sanctioned financial institutions or 'custodians' that hold and maintain the account. Depending on the type of IRA, establishing the account may be a direct procedure between you and a financial institution or insurance company or via a third party such as an employer or financial planner. Financial Institutions are often eager to help with setting up an IRA. This can lead to considerable diversity in the products, services and costs associated with owning an IRA.

When choosing to open an IRA, looking for the option with the most financial potential helps optimize your retirement planning. Many financial institutions offer IRAs, however fees, investment products and maintenance can differ significantly between account custodians. For example, an insurance company IRA may have different reporting procedures and fees than a self-directed IRA through a brokerage firm.

How to qualify for an IRA

To qualify for a traditional IRA, which is not the same as a Roth IRA or Simple IRA, you must also meet the IRS requirements that include having earned taxable income for all years that the IRA is invested in, and  being under the 70.5 year age limit for traditional IRAs. IRAs can be funded with any amount of value up to the annual contribution limit and within the minimum deposit parameters allowed by the IRA custodian.

In the case of employer funded IRAs such as a Simplified Employee Pension IRA your employer will be required to submit additional documentation such as an IRS Form 5305-Sep to the IRS. Individual Retirement Accounts can be rolled over, but must meet IRS authorized criterion. To find out if your IRA rollover is allowable contacting the IRS directly is a good way to find out. Sometimes an IRA may receive direct deposits of assets such as mutual fund shares held within another account.

The different types of IRAs

The differences between each type of IRA are relevant when determining how to open an IRA. For example, a Roth IRA is contributed to with taxable income and has no opening age limit whereas money placed into a traditional IRA is deductible from taxable income and can only be done so up to age 70.5. For an employer IRA such as a Simple IRA, funds are placed into the IRA before being paid out to an employee. Other variations include when withdrawals are required for traditional IRAs and annual contribution matching in the case of Simple IRAs.

Roth IRAs, unlike Traditional IRAs have income restrictions and cannot be funded if your Adjusted Gross Income is beyond the contribution cap. Married couples are allowed to have individual IRAs making the maximum contribution double per married household provided income limitations are met. Allowable annual payments to IRAs vary according to income, and tax filing status.