Money Learning Checklist 4 – IRAs

money management


An Individual Retirement Account (IRA) is a great way to accumulate a retirement stash.  It’s also a great way to protect asset growth and investment earnings from taxation.

I highly recommend contributing as early as possible.  IRA contributions can begin when an individual has earned income.  Therefore, it can begin with a teenager’s part-time earnings.  Visit your favorite bank or online broker and open an account if you don’t already have one.

Learn what your maximum contributions are

IRA contributions come with conditions.  There’s a maximum amount that can be contributed and it can change every year.  Know what yours is.  It’s based on your filing status, married vs. single, etc.  The next condition to reach is eligibility for a tax deduction.  Again, it depends on your filing status and whether you participate in your employer’s retirement plan.

For employees that participate in their employer’s retirement plan, a full or partial deductible contribution is still a possibility if the amount is less than the range specified for the type of filer.  You can easily find the current year’s table for the income ranges by filing status by doing an internet search or by looking in the IRS publication.  Notice that I’m not spelling it out, it’s up to you to gain some awareness.

Don’t be afraid of the website.  The IRS offers publications on every tax subject that have everything you need to know.  They’re written in English for everyday people, so it’s worth it for you to take a look.  Read one for five minutes and see if they help you or not.  Try one of the worksheets, they’re very simple to follow.  Publication 590-A is for IRAs.  The publication explains what you need to know about IRAs in a very simple format.


Roth IRAs

You’ve heard this term thrown around, right?  A Roth IRA is the same as a traditional IRA except the contributions are made with after-tax money.  You will not be eligible for a tax deduction but, the flip side is that the money will not be taxed when withdrawn.

A Roth IRA is a great way to generate tax-free earnings without your money being held hostage.  Firstly, you can contribute at any age, unlike the traditional IRA that doesn’t allow contributions when reaching the year of age 70 ½.  Because there is no tax advantage to contributing to a Roth IRA, you may withdraw the money at any time.  Up until age 59 ½, only the amount contributed can be withdrawn without penalty, not the earnings or growth.  After age 59 ½, withdrawals from the entire account are not subject to penalty.  The best part is that future withdrawals taken during retirement years are never taxed.

Roth IRA Conditions

If you make too much money and participate in your employer’s retirement plan, you are not eligible to contribute to a Roth IRA.  You may, however, contribute to a traditional IRA on an after-tax basis.  This generates basis in the account for you, so you will have to keep track of your contributions.  And don’t forget to file the form with your tax return (page 15 of IRS Publication 590-A).  That’s just an example of your options to beef up your retirement savings.  Cliffhanger: there are others that you should learn about.

Alternative IRA Moves

There are other fun things you can do with IRAs.  If at first you couldn’t make a Roth IRA contribution and contributed to a traditional IRA, you can convert your traditional IRA money into Roth IRA conversions.  A word of caution is that this move requires paying the tax in the year of the conversion to forgo paying it in retirement.

There are contrary opinions to having money in a traditional IRA vs. all in a Roth IRA, where it will never be taxed upon withdrawal.  The traditional IRA money will be subject to income tax when withdrawn, however, total taxable income and the corresponding tax rate are likely to be lower in retirement years.  No one knows what tax rates will be in the future, but it’s likely that retirement income/IRA withdrawals will be taxed at a lower rate.  My attempt is to convert some money over to my Roth IRA, but only what I can manage in an increase to my taxable income right now.  Whatever stays in the traditional IRA can remain.  I’ll cross that bridge when I get there, for example, by minimizing taxable income.

It’s a saver’s paradise for me.   

My IRA has been built up over my working years.  Every time I left a job, I moved my 401(k) money into my personal IRA.  I never withdrew any money – that’s a cardinal sin – and I never borrowed from my 401(k).  Once it was in the IRA account, it was locked down, with no withdrawals, and no 60-day “borrowing”.

Before the Great Recession, my career was at full tilt.  I made too much money to contribute to a Roth IRA, so I made after-tax traditional IRA contributions.  I never pass up a good opportunity to save.  I make less money now, but I still make Roth IRA contributions religiously.  That’s in addition to my employer retirement plan and a Health Savings Account.  I’ve never been happier to be over 50 – I get to put away the catch-up amounts as well.

Investment choices

One last point is that IRAs are not just for mutual funds.  You can own stocks and other investments.  There are some forbidden assets, so check the rules.

Related posts:

Money Learning Checklist 1         Earning/Saving

Money Learning Checklist 2         Spending

Money Learning Checklist 3         Credit

Money Learning Checklist 5         Retirement

IRA Homework:

Tasks Contribute as soon as earning income
Understand maximum amounts
Understand traditional vs. Roth IRAs
Understand “backdoor” contributions
Books/Magazines Personal Finance for Dummies by Eric Tyson
Websites to follow
Online tools IRS Publication 590-A

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