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How to Open an IRA—Understand Eligibility, Rollovers, and Early Retirement

Retirement accounts can be the best way to secure your future--but the rules can be confusing. Laura answers four IRA questions about who's eligible, the rules for doing rollovers, and tips to retire early. 

By
Laura Adams, MBA,
August 2, 2017
Episode #507

Page 1 of 3

How to Open an IRA—Understand Eligibility, Rollovers, and Early RetirementUnderstanding retirement accounts and using them the right way can make the difference between having a secure future or just scraping by, after you stop working.

The benefits of using retirement accounts are powerful. You get to skip taxes on either the money you contribute on the front end or on the withdrawals you take out in retirement, depending on whether you use a traditional or a Roth account.

Problem is, these accounts come with a lot of rules that can be confusing, which may be keeping you from using them. No matter if you’re employed, self-employed, or in some cases, unemployed, you can use an IRA to your advantage to accumulate more money and build wealth faster.

In this article, I’ll answer four questions about IRAs to shed light on who’s eligible to use them, how to do rollovers, and tips to retire early.

Free Resource: Retirement Account Comparison Chart (PDF) - a handy one-page download that explains the differences between the main types of retirement accounts.

IRA Question #1

Chris P. says, “I make about $72,000 a year, but if I qualify for a sales bonus I may earn more. I want to open an IRA, but don’t know if I’m eligible based on my income. If not, where should I invest?”

Answer:

Thanks for your question, Chris! Here’s a quick review of the eligibility requirements for traditional and Roth IRAs:

  • traditional IRA is available to anyone with any amount of earned income. You can make contributions to a traditional IRA no matter if you earn $5,000 or $5 million a year. So, Chris can have a traditional IRA if he likes. You contribute to a traditional IRA on a pre-tax basis, which cuts your tax bill in the current year. Then you take withdrawals of contributions and earnings and pay income tax on them in retirement.  
  • A Roth IRA is only available to those who earn less than an annual income limit. For 2017, you’re allowed to make contributions to a Roth IRA only when your modified adjusted gross income is less than the following thresholds:

o   Married filing jointly: $196,000

o   Qualifying widow(er): $196,000

o   Single: $133,000

o   Head of household: $133,000

o   Married filing separately and not living together: $133,000

o   Married filing separately and living together: $10,000

See also: Which is Best: A Roth or Traditional Retirement Account?

If Chris is a single taxpayer and his 2017 income doesn’t exceed $133,000, he’s qualified for a Roth IRA. But what if Chris has a great year at work and makes a big sales bonus that makes him ineligible for a Roth IRA?

This is a terrific problem that I hope Chris will have! If you contribute too much to a Roth IRA or become ineligible, it’s easy to fix. So, don’t let that concern keep you from making contributions.

Any time you over-contribute to an IRA, contact the administrator of your account as soon as possible to discuss your options. It’s a common situation that custodians are used to dealing with and helping investors resolve.

Any time you over-contribute to an IRA, contact the administrator of your account as soon as possible to discuss your options. It’s a common situation that custodians are used to dealing with and helping investors resolve. If you make a correction before certain deadlines, you may have no penalty or just a small one.

There are typically four ways to correct excess IRA contributions:

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