An investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.
Traditional and Roth IRAs are established by individual taxpayers, who are allowed to contribute 100% of compensation (self-employment income for sole proprietors and partners) up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax deductible depending on the taxpayer's income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible SEPs and SIMPLEs are retirement plans established by employers. Individual participant contributions are made to SEP IRAs and SIMPLE IRAs.
Also known as "individual retirement arrangements Individual Retirement Accounts (IRAs) are a crucial component to many retirement plans. There are two major types of IRAs available. Different IRAs apply to different circumstances in your career and your financial plan. The advice of a financial professional is crucial in choosing the right one.
Traditional IRA:
You don’t pay taxes on your earnings until the time you withdraw from your account.
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You can contribute up to $5000 a year.
Over age 50 “catch-up” provisions allows you to contribute up to $6000 a year.
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The ability to deduct contributions from your taxes depends on your filing status, adjusted gross income, and whether you’re considered an “active
participant” in another account.
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Drawback of IRA
One of the drawbacks of a Traditional IRA is that you cannot make any morecontributions during or after the year you turn 70½ years old. That same year, you must also start taking required minimum distributions from your account.
There are certain withdrawals you can make from a Traditional IRA withoutpenalties, including qualified higher education expenses. One’s ability to
deduct contributions to a Traditional IRA from their income taxes is subject
to income limitations.
Non-qualified withdrawals made prior to age 59½ will be treated as ordinary income and assessed a 10 percent penalty. Always check with your financial professional before withdrawing from an IRA.
Roth IRA:
Contributions are made with after tax dollars.
The contribution limits and “catch-up” provisions are the same as Traditional IRA
Earnings from a Roth IRA will not be taxed when you make qualified withdrawals.
Contributions are not tax deductible.
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There are no age limits on contributions.
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No required minimum distributions, however restrictions on distributions do apply.
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Some restrictions do apply to Roth IRAs. If you are married and file a joint tax
return, you must make less than $177,000 a year to qualify. If you are married,
live with your spouse, and file a separate tax return, you must make less than
$120,000 a year to qualify. If you are single and file as the head of household, or married but didn’t live with your spouse during the year, you must make less than $120,000 a year to qualify
The Roth IRA and the Traditional IRA both share many of the same qualities. But even the slightest differences can make all the difference in the world when deciding which IRA is best for you. There are many more details and much more information available from a financial professional. The added information can help you make the final, fully informed decision as to which IRA suits your retirement plan best.