Your Individual Retirement Account (IRA)

The Most Profitable Contrarian Investment Strategies for 2010 and Beyond
The 2010 Investment U Conference is underway! And even if you couldn't make it, now you can "bring home" more than 30 breakthrough presentations from the conference... Order the Deluxe MP3/Video Library for $99 to listen and view on your computer, or the Premier CD plus MP3/Video Library for $149 to listen to and view anywhere.

Your Individual Retirement Account (IRA): Resolutions for Wealth & Happiness

by David Fessler, Advisory Panelist, Investment U
Wednesday, December 31, 2008: Issue #908

Tonight, we look to the New Year and, hopefully, our resolutions for wealth and happiness. For many, it could be as simple as saving more and contributing to an IRA account. It’s one of the easiest ways to secure a comfortable future.

Unless you’ve just arrived from another country, most of you reading this know IRA stands for an Individual Retirement Account. It’s probably a safe bet that many of you have them and make regular contributions to one, or to a similar workplace retirement account.

Perhaps you have plans to ultimately use the money to fund your retirement, help out with children or grandchildren’s education, or perhaps to purchase a second home.

Suffice to say, it’s never too late – or too early – to start contributing to an IRA. And I can’t think of any reason not to contribute the maximum amount possible. My father used to say, “If you don’t have it, you’ll never miss it.” In addition, many employers will match your contributions to some level, some as high as 50%.

I’m not going to spend time talking about the virtues of contributing to an IRA, or about the miracle of compounding. My colleagues at Investment U have written on this at length. You can read about it in Investment U Issue #785, Your Retirement Plan: Have You Calculated Your Number?

But regardless of whether you are starting out, currently contributing or looking to start making withdrawals, it pays to know a few of the mechanisms behind how you can get to your money. Here are some of the things you need to consider…

When to Use a SEPP Program With Your IRA

Barring any unfortunate circumstances, you will eventually reach the age (normally 59 ½) when you can start voluntarily withdrawing funds from your retirement account.

If you decide to take funds out earlier than 59 ½, you’ll owe ordinary income tax on them, and you’ll be assessed a 10% early distribution penalty.

But like just about everything else in our complicated tax code, there are exceptions to this rule. One of them allows an individual to take assets out under a SEPP Program. SEPP stands for Substantially Equal Periodic Payment and it allows you to take funds out of an IRA regardless of your age.

If you have a short-term need for cash, you should consider other alternatives. A SEPP program, once started, must be continued for a minimum of five years, and you’ll be paying income tax on any and all funds you take out.

The participation period could be much longer if you are younger than 44 years old when you start the program. The reason is that the IRS requires you to continue the SEPP program for a minimum of five years, or until you reach 59 ½, whichever happens last.

If you terminate your SEPP program before the deadline, you’ll have to pay all penalties and taxes that were originally waived on the entire amount taken under the program.

Depending on how much you took out, this could be a tidy sum indeed. The only exception to the early termination rule is if you become disabled, you die, or your assets become depleted due to loss of market value.

Your Individual Retirement Account – What’s an RMD?

Many investors, either out of necessity or because they enjoy it, work well beyond minimum retirement age, continuing to put money into an IRA. Let’s assume you’re in good health, have income other than your traditional IRA to live on, and you are 70 years of age.

You are fast approaching the point at which you must start taking distributions from your IRA. Even if you don’t need the money, the IRS states you must begin to withdraw the Required Minimum Distribution (RMD) by April 1 of the year in which you turn 70 ½.

In subsequent years, you can take your distribution any time prior to December 31. Penalties for missing an RMD or not taking enough are severe, and are equal to half the amount you should have taken out.

The only exception to taking out RMDs from a workplace retirement plan is if you are still working for the company that provides it when you reach 70 ½, and you own less than 5% of the company.

IRS Publication 590 (insert link here) describes in detail how to calculate your RMA amount.

So whether you have already retired, are retirement planning, or are still working, it pays to keep abreast of the constantly changing IRS rules regarding IRAs. After all, it’s your money…

To a prosperous New Year,

David Fessler

Today’s Investment U Crib Sheet

Adding more to a retirement account – regardless of your age – is never a bad thing. If you’re at the point when you’re required to start making distributions – but don’t need the money – we’ll have plenty of ways to put that money back to work for you in 2009. (Exposure to the White Cap Index is our first recommendation.)

But for those who are still contributing, or just starting out, it can be difficult to figure out what kind of IRA account to open. Here are a few of the basics.

An IRA isn’t a type of investment, it’s a type of account. Many still believe that if they open an IRA, the decisions are already made of what to invest in. This is false.
Think of an IRA like an umbrella. It allows you to put almost any investment under it: stocks, bonds, mutual funds, precious metals, etc. The difference between an IRA and an ordinary brokerage account is that the taxman doesn’t pay regular visits – you can grow your money tax-free

Which brings us to the two types of IRA accounts: a Traditional IRA and a Roth IRA. What’s the difference between them?

Roth IRAs allow you to invest post-tax money (up to certain income limits), and when the money comes out, it’s tax-free.
Traditional IRAs allow you to deduct your contributions from your taxes, but when the money comes out, its earnings are taxed.

One of the biggest decisions investors make in their retirement accounts comes down to whether they need tax deductions, or whether they will need tax-free income. It’s a personal choice and there is no one-size-fits-all answer.

However, there are some easier answers when it comes to investment choices. To increase your monthly income, for example, take a look at this government-authorized gas rebate program.