Six Reasons to Consider an IRA

An Individual Retirement Account (or an Individual Retirement Annuity) can offer a great way to help build additional savings for retirement. Here are six reasons why.

Did you know?

You are eligible to contribute to an IRA, even if you’re already participating in an employer-sponsored retirement plan.

Some people mistakenly believe they cannot contribute to their employer-sponsored retirement plan and to an IRA in the same year. In fact, you can contribute to both at the same time. For example, for the 2011 tax year, you can contribute a maximum of $16,500, (or up to $22,000 if you’re age 50 or older) to workplace retirement plans such as a 401(k), 403(b) and 457(b). For 2012, you can contribute up to $17,000 (or $22,500 if you're age 50 or older).

With an IRA, you can contribute up to $5,000 each year for the 2011 and 2012 tax years, or a maximum of $6,000 for each year if you’re age 50 or older. The only requirement is that you have earned income equal to the amount of your IRA contribution. If you can, invest the maximum to both your employer-sponsored retirement plan and an IRA to add fuel to your retirement savings program. Note that withdrawals prior to age 59½ are generally subject to a 10% IRS early withdrawal penalty in addition to ordinary income tax.

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You can contribute to an IRA, even if you don’t qualify for a tax deduction.

If you are covered by an employer-sponsored retirement plan and your modified adjusted gross income (MAGI) is below a certain amount, you may qualify for an income tax deduction if you contribute to a Traditional IRA. Call us at 800 842-2252 to learn more about whether you're eligible for a tax deduction and whether your MAGI limits your ability to contribute to an IRA.

If you’re earning too much to qualify for the tax deduction, this doesn’t mean you aren’t eligible for an IRA — you can still contribute to a nondeductible Traditional IRA or to a Roth IRA. Investing in a Roth IRA can be advantageous because you can withdraw your contributions tax- and penalty-free at any time, and can also withdraw earnings federal tax- and penalty tax free, provided you have had the IRA for five years and satisfy one of the following conditions:

  • Reach age 59½
  • Use the funds for a qualified first-time home purchase (up to a $10,000 lifetime maximum)
  • Become disabled or die

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Using electronic funds transfer to contribute automatically is an easy way to invest, even if you have limited amounts of money available.

By setting up contributions through electronic funds transfer (EFT), you can make either a one-time contribution or arrange for ongoing contributions to your IRA automatically. Through EFT, you can save even small amounts for retirement consistently over time. (Please check your financial services provider regarding the availability of EFT.)

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IRAs can help older investors potentially increase their retirement accumulations.

If you’re age 50 or older, you can take advantage of the IRA "catch-up" provisions, which, for the 2011 and 2012 tax years, enable you to contribute an additional $1,000 each year to an IRA. Also, if you’re age 70½ or older, have earned income and meet the MAGI requirements, you’re eligible to contribute to a Roth IRA.

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If you’re self-employed, a Simplified Employee Pension (SEP) IRA offers a good option for saving large amounts for retirement.

You can contribute up to 25% of your compensation (i.e., earned income) to a SEP IRA. The maximum contribution amount allowed for 2011 is $49,000, and for 2012 is $50,000.

Learn more about SEP IRAs, or for further clarification on the rules governing SEP IRAs, contact your tax advisor.

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You can use an IRA to consolidate retirement assets.

If you have retirement savings with several financial services companies, you can consolidate this money by rolling it into a single IRA. Consolidating your savings with one provider can make it easier to manage your accounts and investment allocations and keep track of paperwork.

Before deciding to transfer assets, note that there may be tax consequences such as fees, penalties and surrender charges. Direct rollovers are subject to surrender charges and penalties. Also, any money you’ve accumulated in a 403(b) plan prior to 1987 is not subject to minimum distribution rules at age 70½; because you don’t need to begin withdrawing this money until age 75, you may want to refrain from rolling it over to an IRA. For decisions relating to consolidation and rollovers, consult with your tax advisor regarding your particular situation.

In addition to the inherent risks associated with investing in securities, there may be fees associated with IRAs.

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