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Janice France-Pettit: Choosing the right IRA is a matter of importance

Union Bank

Posted: January 8, 2010 9:07 p.m.
Updated: January 9, 2010 4:55 a.m.
Your retirement may be years away, but it’s never too early to start planning for your future. Planning ahead, saving and investing throughout your life may help you enjoy financial stability in your retirement years.

Individual Retirement Accounts, better known as IRAs, are a great way to start building your nest egg for your future retirement.

There are several types of IRAs available and you can select the one that best fits your needs for today and for your future. Let’s explore the most common types of IRAs available.

Traditional IRA

The most common type of IRA, the Traditional IRA, allows you to defer taxes on investment earnings. To open an IRA, you need to earn an income and be younger than 70 years old.

With a Traditional IRA, you may be able to deduct some or all of your contributions depending on your income, employer or other factors. Before you invest in a Traditional IRA, you may want to consult your financial advisor or tax accountant to see if you qualify for all these deductions and obtain information on what your maximum annual contribution limits are, which depend on your level of income and your age.

Withdrawals from a Traditional IRA are taxed as ordinary income, and withdrawing funds before age 59 ½ may be subject to a 10 percent penalty, unless you use the money for a qualified expense.  A Traditional IRA requires you to start taking minimum distributions once you reach 70 ½.

Roth IRA
Just like the Traditional IRA, the Roth IRA is a popular type of IRA. With a Roth IRA, all earnings are tax-free, and you are not required to make withdrawals. If you are in need of the cash before you retire, then you are allowed to make tax-free qualified withdrawals of your contributions as long as your assets have been invested in your Roth IRA for at least five taxable years.

Distributions can begin at 59 ½. Before reaching age 59 ½, tax-free distributions may also include disability, education expenses, or purchasing your first home. With this investment, your contributions are not tax-deductible.

If your adjusted gross income exceeds the limits, you may not qualify for a Roth IRA.

Rollover IRA
A Rollover IRA allows you to directly transfer funds from some employer-sponsored plans to an individual IRA. The Rollover IRA requires that you start taking withdrawals at the age of 70 ½, and you are not allowed to make any annual contributions. The

Rollover IRA might contain funds from another tax-advantaged plan that could be deductible even without additional contributions.

Anyone with an eligible rollover distribution may obtain this Rollover IRA plan.

These IRAs are created for business owners. A Simplified Employee Pension (SEP) IRA is available for a small business owner or someone who is self-employed. Employee contributions in the SEP IRA are tax-deductible. In addition, a SEP IRA is easy to organize, and all contributions and earnings for employees are tax-deferred until they are withdrawn. There are employer contribution limits, which vary from year to year, that you may want to consider before investing in this plan.

A Savings Incentive Match Plan, better known as a SIMPLE IRA, is ideal for businesses with fewer than 100 employees. This plan allows you to make either a nonelective or a matching contribution to your employees’ IRAs. Selecting this investment can be beneficial because there is minimal paperwork involved, and it allows your employees to save for their retirement while receiving tax benefits now.

If you are considering investing in an IRA, determine which plan may be right for you based on your financial goals. The IRA you select depends on your current income and what your retirement tax bracket will be.

Saving for retirement now, no matter how old you are, can help you be well prepared for the future.

The foregoing article is intended to provide general information about creating a trust and is not considered legal, financial or tax advice from Union Bank. Trusts, wills, foundations and wealth planning strategies have legal, tax accounting and other implications. Please consult a legal or tax adviser. Janice France-Pettit is a senior vice president and regional manager for Union Bank, overseeing the Simi Valley, San Fernando Valley and Antelope Valley regions. Her column reflects her own opinion and not necessarily that of The Signal.


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