Should I Open an IRA?
WHAT IS AN IRA?
An IRA (Individual Retirement Account) is an individual retirement savings plan that offers tax advantages that are similar to your workplace-sponsored retirement plan. An IRA is also referred to as a "traditional IRA" to differentiate it from a Roth IRA, which is also a retirement savings plan, but with different tax treatment and guidelines.
To contribute to an IRA, you must be under age 70½ at the end of the tax year and you—or your spouse, if you file a joint return—must have earned income, such as wages, salaries, commissions, tips, bonuses, or income from self-employment.
If you work, but your spouse is not employed, he or she may establish his or her own IRA, subject to IRS guidelines.
The money that you contribute to an IRA may be fully or partially tax deductible—and the portion that is tax deductible is not taxed until withdrawal. If you or your spouse participates in a qualified retirement plan at any time during the year, your IRA contributions may not be fully deductible. An IRA's investment earnings are not taxed until withdrawal.
When you withdraw money from your IRA, it will be taxed as ordinary income at your current tax rate. Any withdrawals you make before reaching age 59½ may be subject to a 10% federal income tax penalty. Generally, you must begin taking withdrawals of your IRA money by the April 1st following the year in which you reach age 70½—although your plan may require that you begin your withdrawals earlier.
The maximum amount you can contribute to an IRA and Roth IRA combined for 2016 is $5,500 or your taxable compensation for the year—whichever is less. You may contribute up to $6,500 if you are 50 or older by December 31.
You can open an IRA and make a contribution for a tax year up until the due date (without extension) of the tax return for that year. Generally, this is the April 15 following the tax year. For example, you can make an IRA contribution for 2016 from January 1, 2016 to April 15, 2017.
WHERE YOU CAN OPEN AN IRA
You can set up an IRA at many different financial institutions—such as banks, insurance companies and brokerage firms.
BEFORE YOU OPEN AN IRA…
An IRA can be an excellent way to supplement your workplace-sponsored retirement plan, but be sure you understand the IRS's IRA guidelines before you proceed. Since the information presented here is merely a summary of IRA provisions and neither Prudential nor any of its associates or businesses provide tax advice, you may wish to consult a financial professional for assistance. If you prefer, a Prudential Retirement® Counselor can assist you. Simply call 877-PRU-2100 toll free, Monday through Friday, from 8 a.m. to 6 p.m., ET.