IRAs

Individual Retirement Arrangements, generally known as IRAs (and referred to by financial institutions as Individual Retirement Accounts), are a great way to save money for retirement or in case you become disabled. However, there are very specific rules about the amount of money you can put into an IRA, (contributions), what you can do with the money in the IRA, and when you can take the money out (distributions).

There are several different types of IRAs, each of which have their own features. The two most common are Traditional IRAs and Roth IRAs.  Consider the differences when deciding which is best for you.

Since IRAs are meant to help people save money for retirement, there is generally a penalty for taking money from the account before you reach age 59 1/2. However, you can withdraw money without penalty before age 59 1/2 if you become "disabled" as defined by the Internal Revenue Service and under certain other circumstances. Depending on the type of IRA you own, withdrawals might also be free of any income taxes.

If you are considering or have a Traditional IRA, keep in mind that certain withdrawals are required or there is a penalty for not making the withdrawal..

The earlier in the year you make an IRA contribution, the longer you receive tax-favored investment returns. (If your circumstances change and you become ineligible during the year to make a contribution, you have until April 15 of the following year to withdraw your contribution without penalty.

At least once a year, check your beneficiary designation to be sure it is up-to-date, it is clear as to who gets what if there is more than one beneficiary, and that the beneficiary records of the institution which takes care of your account(s) are correct. Your beneficiaries should also be alerted to check the law about inherited IRAs "just in case."

If you have limited funds and have a Health Savings Plan such as a Flexible Spending Account, Health Savings Account or Health Reimbursement Account, consider funding the Health Savings Plan first. Unlike an IRA account, there is no threshold for using money in the account to pay for medical expenses.

NOTE: Be sure to check your beneficiary statements every year. Even if you set up the record correctly and haven't changed your mind about your beneficiary, the financial institution may make a mistake in its records.

For additional information see:

• What Is An IRA?
• Why Should I Consider Having An IRA?
• Types Of IRAs 
• Eligibility And Rules About Contributing Money
  
• Getting Money Out Of An IRA
  
• Is A Traditional IRA Or A Roth IRA Better For Me?
  
• IRAs: Frequently Asked Questions
  
  • When can an IRA be set up?
  • Where can I set up an IRA?
  • What investments can I make through an IRA?
  • Are assets in an IRA protected from creditors?
  • Is an IRA community property?
  • Can I use an IRA as collateral for a loan?
  • Can I convert a traditional IRA to a Roth IRA?
  • What happens to the money in an IRA if I die?

  Edited by: Peg Downey, CFP, NAPFA, Money Plans, Silver Spring, MD

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