How to Make Pre-Tax Contributions to an IRA

An IRA is a way to fund your own retirement. There are two types of individual retirement accounts, the traditional IRA and the Roth IRA. Investments in a traditional IRA are tax-deductible if certain requirements are met. Start preparing for your future savings by following the steps below.

Step 1

Choose an investment company that offers retirement plans. Two examples are T. Rowe Price and Fidelity. Most mutual fund companies and online stock brokerages like Scottrade have traditional IRA investment opportunities.

Step 2

Decide on the investment product or products. You may choose among stocks, mutual funds and certificates of deposit to name a few.

Step 3

Pick specific stocks or mutual funds. Visit the website of the investment company or talk to the broker to find out what is available. For example, T. Rowe Price has a variety of mutual funds to choose from, like the International Discovery Fund or the Retirement 2040 Fund. Your financial adviser can help you pick the specific products that will meet your retirement goals and your individual needs.

Step 4

Open the account. Most companies allow you to open the account online. You can also open the account by phone or by setting up an appointment in a local office. To open the account, you need your Social Security number and a choice of investment.

Step 5

Decide how to fund the account. One option is to make automatic contributions each month that come out of your checking account. A second option is to make one lump sum investment whenever you have the cash available. There are limits to the amount you can invest for the money to still be tax-deductible. In 2008, the amount was $5,000 for example.

Step 6

Make the initial payment by check once you have opened the account. The initial funding for your account usually needs to be from a check from your financial institution. Subsequent investments, such as monthly contributions, can be taken directly from your checking account.

Step 7

Understand what it means to make a pre-tax contribution to a traditional IRA. You are not actually having pre-tax income deducted from your paycheck and sent to the company. This only happens with Deferred Compensation Plans offered through your employer. Instead, you get a deduction on your taxes up the maximum allowed amount at the end of the year, meaning that you don't have to pay taxes on the money invested in the traditional IRA.

Tip

Refer to Publication 590 of the IRS to get more information on traditional IRAs. You must meet the requirements for investing in a traditional IRA. You must have earned income at least the amount of what you invest each year. For the investment to be tax-deductible, your income must not exceed a certain amount.

Warning

Be sure to read the prospectus before investing in any mutual fund. It is wise to talk to a financial adviser before making any investments. Be sure that a traditional IRA is the investment of choice for your retirement needs. Traditional IRAs have mandatory distributions once you reach a certain age, and you can't take out your contributions before retirement without a penalty.

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