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Individual Retirement Accounts: Options for Your Future

April 4, 2007

By: Jim Oosterman
Melrose Bank

When it comes to retirement, it is never too early or too late to start planning and investing for your future. A number one financial goal among adults is retirement. There are several ways to plan for your retirement, but one of the best options is to open an individual retirement account, or simply put, an IRA. What is an IRA? It is a personal retirement plan that is available to anyone who receives any type of taxable compensation during the year. Compensation is defined as wages, salaries, tips, bonuses, commissions, taxable alimony and separate maintenance payments. You can open an IRA at a bank, credit union, or through a financial planner.

If you do not contribute to an IRA, think about what other means of retirement savings you have. If you are counting on Social Security or a traditional pension plan, these sources of revenue may not completely replace your pre-retirement income. If you're on the younger end of the age spectrum, relying on Social Security is not a good idea, since there is no guarantee that the payments you make will be available to you at retirement. If you have a company-sponsored retirement plan with an employer match, such as 401k or 403b, you should at least be putting in enough money to get the match. After you are doing this, then consider an IRA.

There are several different types of IRA's, but the two most popular are the traditional IRA and the Roth IRA. The traditional IRA allows tax deductible contributions. Although contributions are tax deductible, any funds withdrawn before 59.5 years of age are assessed a 10 percent penalty with few exceptions. Traditional accounts have a mandatory withdrawal age of 70.5 and taxes must be paid upon withdrawals. A person up to the age of 70.5 may contribute to a traditional IRA as long as they have earned some type of income. Due to tax advantages, it is best to try to make the maximum contribution. This IRA is available without any income restrictions, as opposed to the Roth, which is only available to single-filers who make up to $95,000 or married couples making up to $150,000 each year.

With a Roth IRA, contributions are taxed when they are put in. However, the account holder pays no taxes on distributions after the age of 59.5. Contributions can be withdrawn after a five year waiting period, without incurring a tax penalty. The Roth IRA gives you the opportunity to continue contributing to your account after the age of 70.5. For many people, the Roth IRA can be a better choice, depending on your current tax bracket and your expected tax bracket at retirement. No matter which IRA you choose, the Federal Government imposes annual contribution limits. Deposits to your IRA can be made at regular intervals, or in lump sums.

IRA's are not just for adults and retirement planning. Although retirement is the main purpose, you can also set up an IRA account in preparation for your child's education expenses or for your spouse. An educational IRA requires that your child has earned some type of income, through a regular job, or by doing odd jobs for neighbors, through child care, or some other form of employment. Some investment companies will not open an educational IRA, so look around for one that does. With a spousal IRA, requirements are that your spouse must have little or no income; you must be married by the end of the tax year, and file a joint tax return. The amount you can contribute must be less than your income.
There are penalties for withdrawing funds from your IRA before age 59.5. However, the early withdrawal penalty does not apply in the following eight circumstances:

  • IRA owner's disability
  • IRA owner's death
  • Regular withdrawals upon which to live
  • Funds are used to pay for unreimbursed medical expenses that exceed 7.5 percent of adjusted gross income
  • Funds are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks
  • Funds are used to pay the costs of a first-time home purchase (subject to lifetime limit of $10,000)
  • Funds are used for qualified expenses of higher education for the IRA owner and/or eligible family members
  • Funds are used to pay back taxes due to an IRS levy placed against the IRA.

There are many considerations when planning for retirement, dependent upon your circumstances now and your projected future situation. The best advice is to seek out professional guidance. IRA's are just one tool in an arsenal of financial resources available at your disposal.

James Oosterman is the Vice President of Melrose Bank. He can be reached by telephone 781-665-2500, online at or on Facebook at

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