Around this time of year, many credit union members may be kicking themselves for not planning quite as well as they would have liked in order to lessen the tax load for 2011. However, it’s not too early to start thinking about next year’s taxes! And, a great way to significantly reduce your tax bill is with a traditional IRA. Plus, in addition to shrinking the amount of taxes you owe, a traditional IRA will help jumpstart your retirement savings plan.
If a traditional IRA sounds like it might be a good solution for you, then your credit union is the perfect place to go – think of it as your one-stop IRA shop. A representative at your CU will help you understand the nuances of an IRA, guide you through setting up the account, and equip you with the tools and knowledge to manage your IRA. If you would like to learn a little bit more about the traditional IRA before actually visiting your credit union, read on for some helpful info on IRA benefits and tips on how to get started.
What is a Traditional IRA?
According to irs.gov, a traditional IRA is defined as a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets certain requirements as outlined by the IRS in Publication 590. And, according to investopedia.com, an IRA allows individuals to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred meaning no capital gains or dividend income is taxed.
Traditional IRAs can be opened at a financial institution like your credit union or a bank as well as at a discount brokerage or large investment firm. Keep in mind, your credit union knows your financial history, especially if you have been a longstanding member. And, most credit union investment programs, in the spirit of People Helping People, will have the financial well-being of all members in mind, whether you are just developing your savings plan or managing larger assets. Wherever you decide to open your IRA, you will have some paperwork to fill out, and will need the funds for your contribution to be accessible.
Basic IRA Benefits
There are many benefits to having a traditional IRA but some of the basic ones include:
IRA and Tax Deductions - As we mentioned earlier, one of the major benefits of a Traditional IRA is that your yearly contributions are usually tax deductible. Money invested in a traditional IRA is tax deferred and taxed only when money is withdrawn.
IRA and Your Spouse - a Traditional IRA may be set up by a spouse for a non-working spouse. Although there are guidelines such as being married with a joint income tax return, this is an ideal to help establish a retirement fund for a non-working spouse (i.e. a parent who stays at home to care for children).
IRA and Home-Buying - If you are planning on buying a new home, you can use funds from your IRA, penalty-free. Keeping in mind the associated limits and rules, you may be able to use this money toward your first home as well as a home for your spouse, grandchildren, or for yours and your spouse's parents.
Making IRA Contributions
When opening your IRA, be sure to do so with at least the minimal amount necessary which is typically several thousand dollars. The more you are able contribute at the start, the better, since your annual IRA contributions will be limited by certain IRS rules. Now, it is best to figure out how much you will contribute on an annual basis, and do so regularly via cash, check, or direct deposit.
IRA as a Tax-Time Tool
Although we are talking about planning ahead here and that is the goal for most people when it comes to taxes, if you do find yourself sort of scheming to lower your tax bill at the last minute (usually during February or March), an IRA works here too. Simple make a contribution and designate that it be put toward the previous year.