Get to Know Your IRAs
If you’re ready to start saving for your future using an individual retirement account, you’re in good company. According to the Investment Company Institute, Americans held more than $4 trillion in IRAs as of March 31, 2010.
Some people have the misconception that an IRA is an investment, same as a certificate of deposit or mutual fund. In reality, it’s a tax-deferred account that gives you the flexibility to choose the types of products you put in it, such as mutual funds, annuities, stocks, bonds, certificates of deposit and money market accounts.
You also can use IRAs to take direct control of money that’s held for you in retirement plans at former employers. Using what’s known as a rollover, you can move that money into an IRA without having to pay taxes and usually have additional investment options.
Types of IRAs
Traditional IRAs
Most people younger than 70½ with earned income can contribute to a traditional IRA. Depending on your income and whether you’re covered by a retirement plan at work, you may be able to deduct all or part of what you contribute. Regardless of whether you take a deduction, you won’t owe any taxes on the growth of your account until you start making withdrawals.
With a few exceptions, withdrawals before age 59½ are generally subject to income taxes and an additional 10% penalty.
Roth IRAs
This IRA turns the tax advantages of a traditional IRA on its head: There’s no deduction for contributions, but qualified withdrawals of earnings after age 59½ are tax-free.
You also can withdraw your contributions anytime without paying taxes or penalties. While you can only contribute to a Roth if your income is below certain limits, anyone can move money from a traditional IRA into a Roth through a process called conversion.
SEP-IRAs
Self-employed individuals and business owners can open Simplified Employee Pension-IRAs, or SEP-IRAs. Easy to establish and maintain, a SEP is a much simpler alternative to a 401(k) or a pension plan. One of the most attractive features of a SEP is its generous contribution limit.
SIMPLE IRAs
Available to businesses with 100 or fewer employees, a SIMPLE IRA, or Savings Incentive Match Plan for Employees, allows for both employer and employee contributions. If you have employees, a SIMPLE requires you to either match their contributions dollar for dollar up to 3% of their salary, or contribute a fixed 2% of their income even if they don’t chip in any of their own money.
2010 Contribution Limits |
||
|---|---|---|
| Under Age 50 | 50 and Older | |
| Traditional and Roth | $5,000 | $6,000 |
| SEP | $49,000 or 25% of compensation, whichever is less | $49,000 or 25% of compensation, whichever is less |
| SIMPLE | $11,500 | $14,000 |
| The SEP calculation differs somewhat for self-employed individuals; see IRS Publication 560. | ||
Investment and insurance products are not deposits, not insured by FDIC or any government agency, not guaranteed by the Bank. Investment and certain insurance products may lose value.
There may be tax consequences associated with the transfer of assets. Indirect transfers may be subject to taxation and penalties. Consult with your own advisors regarding your particular situation.
USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.
Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License #0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.
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