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How To Open An IRA Account

How To Open An IRA Account

Opening an Individual Retirement Account is actually a simple process which can be done with most financial institutions. The Internal Revenue Service does however enforce certain requirements for consumers to take advantage of the tax benefits afforded by these types of accounts. As long as you qualify, you can open an IRA online or in person at a local bank or credit union or anywhere else IRAs are offered.

Types of IRAs

When planning to open an IRA, it should be known that there are two types of retirement accounts available to consumers. The first is a traditional IRA which allows qualified taxpayers to make an IRA contribution up to a certain dollar amount each tax year. Traditional IRA contributions realize a tax benefit by lowering the taxpayer's adjusted gross income and tax burden. Distributions however are taxed when the account holder starts drawing from their traditional IRA. The other type is a Roth IRA which does not provide a tax benefit initially but earnings grow tax-free. Roth IRA distributions are also tax-free if collected after the approved retirement age as outlined in IRS publications and on the IRS web site.

IRA Qualifications

Not every taxpayer will qualify for a Traditional or Roth IRA so it is important to read the provided tax related materials to make sure you're able to open an account. Taxpayers must have an adjusted gross income below a certain dollar threshold in order to contribute an IRA. When calculating annual income, include all sources such as dividend and capital gains as it may affect your ability to contribute to an IRA. For more information on the current annual income limits to qualify for an IRA, consult the IRS website and corresponding IRA publications.

IRA Tax Deductions

Qualifications for an IRA and benefiting from an IRA tax deduction are separate considerations based on adjusted gross income. While a taxpayer may qualify to open and IRA and make an annual contribution, they may earn too much money to claim an IRA tax deduction when filing taxes. Of course, Roth IRAs have no immediate tax deduction benefit due to the tax-free earnings and distributions which are realized at retirement age. For some taxpayers, the immediate tax deduction is more important during higher income earning years and less relevant during retirement when they are in a lower tax bracket.

Pick an IRA Agent

Fortunately for consumers, IRAs are flexible enough to be opened at many different financial institutions offering access to a variety of investment vehicles. More aggressive investors may choose to open and IRA at a brokerage firm to invest in stocks or mutual funds. Banks and credit unions are also able to open up IRAs and place the funds in a Money Market account or Certificate of Deposit. This variety is available because an IRA is a tax designation specified by the federal government and not a singular type of investment.

Open Your IRA

Once you decide on which type of IRA you wish to open and select the appropriate financial institution, then it's just a matter of signing some paperwork and writing a check. Be sure to read all provided contract documentation and check for IRA custodial fees or other small print disclosures. If you have a specific goal in mind for your IRA, ask questions to make sure the organization is able to provide the necessary services. Always keep in mind the maximum annual contribution amounts since over contributing to an IRA can cause significant tax complications. For most consumers it is as simple to open an IRA as it is a checking account.

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