How to get money into my IRA and put it to work for me?

There are a couple of things you need to know so that you can get your money into your IRA and get it working for you. First of all, an IRA is an Individual Retirement Arrangement (or Account) and, if it’s not already, this will become a key component of your retirement savings plans.

Quick Summary of IRA rules

• There are contribution limits that you can make to your IRA. Starting in 2019 tax year you may contribute up to $6,000 per year (up to $7,000 if you are 50 years of age or older). Starting in 2020 there is no age limit on contributions.
• In a traditional IRA your contributions are tax deductible in the year you make them. In a Roth IRA they are not.
• Your investments within your IRA will grow tax deferred (traditional) or tax free (Roth).
• When you withdraw from your traditional IRA the money will be taxed as ordinary income.
• The new age limit for mandatory withdrawals on a traditional IRA is age 72. If you turned 70.5 in 2019 or earlier you were required to begin taking disbursements at that time. (No mandatory withdrawals for a Roth IRA until the owner dies).
• Early withdrawal – before 59.5 years of age – incurs a penalty of 10% and income taxes except in a few special cases.

What Instruments can you hold in your IRA?

Both the IRS and your financial institution will have restrictions on what types of investments you can hold in your IRA. The IRS is the law and must be followed, whereas you can shop around to find an institution that will allow you to invest the way you want.

For the most part, anything that is liquid and easily valued will be allowed. Examples include stocks, bonds, mutual funds, ETFs and CDs. Even real estate is allowed in a self-directed IRA plan (with some rules and regulations).

Generally speaking, collectibles are not allowed as investment vehicles within your IRA. This includes fine wine, art, rugs, coins (with some exceptions), comic books, jewelry, stamps, etc. The rule of thumb is that if your collectible has a value that is generated predominately from itself – such as high concentration gold coins – and not from the sentimental value of the item.

So American Eagle and Canadian Maple Leaf coins are allowed, but the old American Double Eagle gold coins are not. The rules can be complicated but you can learn more about them from the IRS or from your custodian.

How to open your IRA

You can open your IRA just like you did your checking account at your financial institution, it’s almost that simple.

There are some income limitations on a Roth IRA – if you earn too much you are prohibited from opening a Roth IRA - but this limitation does not affect a traditional IRA.

You can open an IRA at almost any bank or credit union – although you may be limited in the types of investment vehicles you can choose. The same applies to mutual fund companies. Another option is to go with a virtual investment platform. There are many of these now available online and most charge less in fees than traditional financial institutions.

You will need ID to open an account. Your social security number and a driver’s license along with your account numbers for your checking or savings account (this is so you can easily fund your new IRA). You will also be asked for your employer’s name and address and your beneficiary’s name, address and social security number as well.

How to fund your IRA

Once you have opened your IRA you need to decide how to get your money working for you. If you have your IRA at a mutual fund company, bank or credit union you will probably have to choose from some of their branded instruments. If you are with an online platform there is usually more choice, and if you have a self-directed IRA there will be limitless choices within the law.

Which ever institution you choose be sure to familiarize yourself with the fees they charge and the services they provide as they can vary a lot.

One of the very best and least painful ways to fund your IRA is through your tax refund. That money was never in your pocket so it is easy to just transfer it to your IRA.

One of the axioms of being wealthy is to pay yourself first. If you can set up a monthly contribution directly from your checking/savings account into your IRA that is automatic you will never miss a contribution and your retirement account will grow consistently.

For low and moderate income earners there is also the ‘savers credit’. This non-refundable tax credit lets qualified individuals enjoy a tax break by reducing their liability which can boost their retirement savings.