People often talk about tax breaks for the rich. Individual Retirement Accounts
(or IRAs) are a tax break for the rest of us.
Congress
passed IRA legislation in 1975.
It is a very simple idea.
Any person who doesn’t have a retirement plan at work
(or just a small one) has the right to set aside money for
retirement without getting taxed on it.
The
legislation allows you to contribute up to a maximum amount
each year and write this money off your federal and state income tax returns.
Let’s
say you’re making $30,000 a year and you put $3,000 in your
IRA. Now you’re only taxed on $27,000 income. However, the
government does tax the money your IRA earns in interest
or returns.
A
common misconception is that IRAs are a kind of investment.
An IRA is not a stock, mutual fund or CD
– it is an account, usually held
at a credit union, bank, brokerage or insurance company.
This
account holds investments you select to put into it.
You could think of an IRA as a “box” that you put
money into and can take out only at retirement.
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You
can put stocks, bonds, mutual funds, CDs, share certificates, or whatever investment you want in your IRA
“box”.
You can replace a bad investment for a better one,
as long as you keep it in your “box”.
You can choose to stop paying into your IRA. However,
once you start your IRA, the government requires you to keep
careful records from year to year.
If
you are married, your spouse may qualify for an IRA, too.
There are no joint IRAs.
You
can put the maximum allowed amount in your IRA all at once on
Income Tax Day (April 15th), or you can deposit
little amounts throughout the year, and thereby earn even more
interest and tax breaks.
A good way to keep building your IRA is to sign up for an
automatic monthly deduction plan that will deposit money into
a mutual fund or other investment choice before you’re able
to spend it somewhere else.
If
your goal is to contribute $3,000 a year, you can do so by
contributing just $57.69 a week.
If you contribute $3,000 each year to a Roth IRA growing tax-free at the historical average of
10.6% for the stock market, you will have more than $500,000
in 30 years.
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