IRA Basics

If your employer doesn’t offer you the opportunity to participate in a 401(k) plan, your best bet for establishing a retirement plan may be to start an Individual Retirement Account, or IRA. Here’s how it works:

You can open an IRA at almost any financial institution. Starting an IRA is as simple as going to your local bank, filling out a few forms, presenting the required identification, and starting your contributions.

Your contributions will likely be tax-deductible, although there are some limits. You’ll want to check with your financial advisor or your financial institution.

IRA’s offer tax-deferred growth, meaning that earnings on the money in the account are not taxed until money is withdrawn from the account. And since you’re usually in a lower tax bracket by the time you retire and start withdrawing money from your IRA, this equates to tax savings for you.

There are limits to how much you can contribute to your IRA each year. For 2010, if you’re under age 50, the most you can contribute is $5,000. If you’re age 50 or over, you can contribute up to $6,000 to your IRA.

There are also rules that govern withdrawals from your IRA.

You’ll be penalized for taking money out too early. With certain exceptions, money taken out before you reach age 59 ½ will be subject to a 10% penalty, plus income tax.

And, you’ll be required to take a certain amount out of your account on an annual basis after you reach age 70 ½. This is called a Required Minimum Distribution, and it’s calculated based on your life expectancy and the balance remaining in your account.