Only 10 percent of eligible Americans contribute to an individual retirement account, commonly known as an IRA, according to an Employee's Benefit Research Institute survey. With such low numbers, many people will enter retirement without enough savings to ensure a comfortable lifestyle. Opening an IRA account will not only help you save for your future, but getting started with retirement savings also provides some additional bonuses.
When you open an IRA, your money grows tax-free, possibly for many years depending on your age when you open the account. You just make your yearly contributions, and you do not have to account for the gains on your money each year on your income tax forms. If you open a traditional IRA, you pay taxes on your withdrawals as normal income when you retire, possibly at a lower tax rate than you currently pay. With a Roth, your investment gains are completely tax free in retirement as long as you have had the account open for at least five years.
If you qualify, you can deduct the amount of your traditional IRA contributions from your taxable income, giving immediate tax savings. You do not have to itemize deductions to do this, as you claim traditional IRA deductions as an adjustment to income on either Form 1040 or Form 1040A. If you are in the 25 percent tax bracket, a qualifying $5,000 contribution to your traditional IRA will save you $1,250 in taxes that year.
If you have relatively low income, you may be able to claim a tax credit for a portion of the money that you contribute to your IRA account. To claim the credit, you must be over 18, not a full-time student and not claimed as a dependent on someone else's tax return. Also, if you are married and file a joint return, your adjusted gross income must be below $56,500 at the time of publication, as of 2012. Single filers must have an AGI of less than $28,250, and head-of-household filers less than $42,375. For contributions up to $2,000, you may receive a credit of up to 50 percent of the contribution amount. The credit amount decreases as your income rises.
By funding a Roth IRA over the years, you can set up a tax-free annuity for your heirs providing a lifetime source of income. An IRA can pass directly to your beneficiaries outside of your estate, without probate or estate taxes. A nonspouse beneficiary can take ownership of the inherited IRA, but must take yearly withdrawals from this account based on his life expectancy. By stretching out the withdrawals, the remainder of the money continues to grow tax free.
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