About Individual Retirement Accounts
By Kumar B Trivedi Published: 12/26/2008
Who can invest in a Retirement Plan?
All kinds of workers can benefit from investing in a retirement plans, including sole proprietors and small business owners. To be eligible, you must meet certain criteria including length of employment, marital status, age and income. Earned income (from salary, commissions, or alimony) is required for opening a retirement plan. Income that you receive from investment related dividends, annuities, or a rental property (passive income) does not make you eligible for a retirement plan. Retirement plans cannot be owned jointly but only by the individual who initially established it.
How do you establish a Retirement Plan through your employer?
Most employers sponsor different kinds of retirement plans that you will be able to invest in, including 401(k)s, 403(b)s, and 457(b)s. If you decide to open a retirement plan through your employer, your company’s human resources or benefits department will work with an outside bank or firm and set one up. Once the account has been established, you will work with representatives from that firm to manage your plan.
How do you establish an Individual Retirement Plan?
Retirement plans can be established through a bank, your employer, an insurance company, or through a financial services firm. You can manage your retirement plan on your own if you establish one through a financial services firm or insurance company. These firms offer a special kind of plan called and IRA (Individual Retirement Plan) and can be set up online or in person, with a minimum deposit of at least $500 to $1000.
What are the Contribution Limits?
Contribution limits specify the sum of money you can invest into your IRA. These contribution limits vary from plan to plan, but catch-up contributions will allow individuals over 50 to have higher contribution limits. Retirement plans can be funded in various ways including payroll deductions and independent earnings. Payroll deductions will deduct money directly from your earnings and transfer them into the account.
Are there any Withdrawal Penalties?
Should you make a withdrawal on your retirement account before the age of 59 ½, a 10% penalty will be incurred. The IRS does, however, waive the penalty if the withdrawal was made for a qualified expense such as medical emergencies, disability, college tuition, and the purchase of a home.
How do you transfer funds between accounts?
A retirement plan’s assets can be easily moved through rollovers and transfers. When you leave a company where you had an existing retirement plan, you can move the funds over to a new company’s retirement plan or a rollover IRA. When moving funds between IRAs that are not affiliated by employers, you may do so through a transfer.
What about beneficiaries?
Selecting a beneficiary is also another option available in retirement plans which would allow your plan’s assets to be received by an appointed individual upon your death. If your primary beneficiary should pass away, a Contingent Beneficiary will then receive the assets.
When do you begin taking withdrawals?
After the age of 70 ½ you will be required to begin taking withdrawals from the plan through Required Minimum Distributions (RMDs). An excess accumulation penalty of 50% equal to the amount that should have been withdrawn will be incurred if you fail to collect these RMDs. Also, there are some annual maintenance fees ranging from $15 to $50 that some plans charge.