1990 Westwood Blvd. #200
Los Angeles CA 90025
Phone: (310) 446-0088; Facsimile: (310) 446-0079
"TIP OF THE MONTH"
(January 1996)
Save Taxes
Save for Your Retirement at the Same Time
Open an Individual Retirement Account (IRA)
Before You File Your 1995 Income Tax Return
Anyone with earnings from wages or self-employment can open and contribute up to $2,000 of their earnings to an IRA. Your contribution to your IRA is tax deductible from your income, and can reduce your income tax by hundreds of dollars, depending on your income tax bracket. You can even make the contribution when you file your return for the previous year and still take the deduction for the previous year.
It is easy to open an IRA. Simply go to your local bank and ask them for their standard IRA account form. Take the form home and read it carefully. Every form is different. When you are satisfied you want to open the account, just complete the form, name a beneficiary (you must generally name your spouse as primary beneficiary if you are married), and give the bank your check for up to $2,000. That's it.
The IRS will not tax the money you earn from investing your IRA contributions until you withdraw funds from your IRA. If you withdraw funds from your IRA before you retire, you may have to pay an early withdrawal penalty. When you turn 70 1/2, you must start withdrawing funds from your IRA, and you can no longer make contributions to your IRA.
In general, you can invest your IRA in almost any prudent investment, except collectibles, and property in which you have an ownership interest. You may invest in stocks, bonds, mutual funds, treasury instruments, certificates of deposit, and similar types of investments.
If you were to invest $2,000 annually in your IRA beginning at age 30, and earned an average of 6% (compounded annually) each year, you would have accumulated more than $318,000 in your IRA by age 65. Your tax deferred savings grow much faster than savings accumulated with after tax dollars.
The IRA rules are quite complex when it comes to prohibited transactions, early withdrawal penalties, excess contributions, rollovers, trustee to trustee transfers, and retirement distributions. You should seek competent advice if you plan to engage in any of these transactions.
When you start withdrawing your IRA funds, you may be in a lower income tax bracket, thus further enhancing your retirement nest egg.
Keep your eye on the U.S. Congress. They may change the rules soon, making IRA's even more attractive.
If you would like more information about opening an IRA, send me an e-mail message,
and I will help you.
mhl@michael-lester.com
As always, general advice may not apply to your specific situation, and rules change constantly, so you should get a professional opinion before you rely on this information.
Read the "Tip of the Month" for
December 1995. "Economic Reality Audits. Should You Be Afraid?"
Read the "Tip of the Month" for
November 1995. "Should You Buy or Lease Your
Next Car?"
Read the "Tip of the Month" for
October 1995. "Save Taxes! Put Your Junior Programmers to Work"
Read the "Tip of the Month" for
September 1995. "California Statutory Wills"
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Michael H. Lester (mhl@michael-lester.com)
mhl@michael-lester.com
http://www.michael-lester.com
Copyright © 1995-2002 Michael H. Lester