As a lucrative investment strategy, low interest rate savings are not at the top of the list; but in this conservative market, there are options that can offer a comprehensive way to keep track of incoming funds. The IRA savings account is one of these. Unlike a traditional retirement arrangement, there is no minimum balance required, and the institution holding it does not penalize you for early withdrawals. Open an account insured by the ‘National Credit Union Administration’ and your money is protected to the tune of $250,000.
Tax Benefits
The IRA savings accounts are guided by the same IRS regulations as a traditional fund, and can be designated a traditional, Roth, or CESA for funding education. In a traditional option, deposits are not taxed, but the money is taxed on withdrawal. In addition, additional penalties apply for early withdrawal. For a Roth savings, deposits are taxed as earned income, but not taxed on withdrawals after a five year waiting period, and the depositor reaches the age of 59 ½.
Growing money in a savings account may be a slow process, but it functions as a tax shelter in an insured, secure environment. Annual deposit limits do apply; currently $5,000 dollars per year or $6,000 if you are fifty years of age or older. However, a deposit can be made anytime it is convenient.
Roth and Educational Savings
The Roth IRA savings account has unique features. As mentioned above, deposits are taxed as regular income, but are not taxed again upon withdrawal, so they can grow tax-free indefinitely. The Roth allows people with incomes as high as $105,000 for singles, and $167,000 for married people to begin contributing. This type of arrangement also allows access to funds sooner and more options for making withdrawals.
Any money contributed to the Roth can be taken out whenever you like without penalty. However, any money earned on the principal will be taxed and incur a ten percent fee for being pulled out early. To avoid penalties completely, do not touch the money until the account has been open for five years, and you have reached the minimum age for distribution, 59 ½.
CESA
The ‘Coverdell Education Savings Account’ is another was to take advantage of IRA tax benefits. Different from the traditional and Roth models, the CESA allows money to be withdrawn for elementary and secondary, as well as higher education needs. The money can be taken out for educational expenses without penalty, and without age restrictions on the holder of the account.
Similar to a Roth, funds contributed to the CESA are not tax deferred, but will not be taxed when taken out. To qualify, the child designated for the CESA may not have benefited from previous contributions in the same calendar year. The maximum contribution is $2,000 for a married couple showing income of $190,000 or less; but those earning over $220,000 per year are not eligible to open a CESA.
Each IRA savings account option offers a way to grow your money tax free, and for people who fall into the eligible income ranges, any tax break is welcome.
Looking for Something? Search here:
(examples: auto, banking, college, credit cards, debt, frugality, insurance, investing, loans etc.)
