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WHAT IS AN IRA? INDIVIDUAL RETIREMENT ACCOUNT

An IRA is a savings account with tax advantages, making it an ideal way to start saving for retirement. The two main types of IRAs are your Traditional IRA and the Roth IRAs.  Understanding the difference and knowing which type of IRA is right for you is very important.

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THE TWO MAIN TYPES OF IRA’S
TRADITIONAL IRA

Traditional IRA is a tax-deferred individual retirement savings account. When you make withdrawals in retirement you pay taxes on your money. Term deferring taxes means all of your dividends, capital gains, and interest payments can accumulate each year without being hindered by taxes. This allows an IRA to grow much faster than a taxable account.

ROTH IRA

An individual retirement savings account that permits your money to grow tax-free is termed a Roth IRA. You have already paid your taxes on the money you are depositing to a Roth allowing it to grow tax-free. At the time of retirement, when you withdraw there are no taxes. Income decides the eligibility for a Roth account. Principal contributions can be withdrawn at any time without penalty. (may subject to some minimal contributions).

READ OUR BLOG POSTS ON IRAS:
TRADITIONAL / ROLLOVER IRA

  • Most individuals below age 70 ½ who earned and can contribute up to $6,000 ($7,000 if you are more than 50 years old) per year into an IRA account can establish a Traditional or Rollover Individual Retirement Account (IRA).

  • If joint income is below $193,000 a total of $6,000 ($7,000 if you are more than 50 years old) deductible contribution per person is available for each working couple and below $122,000 for single filers.

  • For married couples, partial deductibility is available with combined incomes between $189,000 and $203,000  and single filers with income between $122,000 and $137,000.

  • Individuals who participate in company, agency, or non-profit retirement plans including SIMPLE IRAs, SEP IRAs, 401Ks, 457 plans, 403Bs, deferred compensation plans, etc., cannot develop a deductible IRA account unless their income is less than $193,000 for married couples and $64,000 for single individuals.

  • A person who isn’t active in the company plan, but their spouse is active, may make a tax-deductible contribution to an IRA account only if their income is less than $193,000.

  • There isn’t any tax on growth within an IRA, including dividents, interest and capital gain. Ultimately money removed is taxable as ordinary income.

  • Withdrawals for your IRA account before 59 ½ years may be subjected to taxes or even worse, a 10% IRS penalty. This 10% IRS penalty (no taxes) on withdrawals is available only if the owner takes substantially equal periodic payments for at least 5 years.

  • Distributions- Rollover IRA withdrawals require to be started after the owner turns 70 ½ years. For non-compliance, a 50% tax penalty of the amount that should have been withdrawn is later assessed.

  • Homebuyers can withdraw a lifetime maximum of $10,000 without taxes or penalties for the very first time.

  • Higher educational expenses can be met by withdrawals from traditional IRAs without facing any  penalty

  • Different investment choices for funds are also available.

ROTH IRA

  • Most individuals can establish a Roth Individual Retirement Account (IRA) regardless of age or income limit.

  • Individuals who participated in various companies, agencies, non-profit retirement plans: SIMPLE IRAs, SEP IRAs, 401Ks, 403Bs, 457 plans, etc. can establish a Roth IRA.

  • If the earned income is at least equal to the amount contributed, up to $6,000 ($7,000 if you are age 50 or older) per year per participant can be contributed.

  • When modified family annual gross income reaches $203,000 or more per year for married couples and $137,000 or more for single filers, no contribution is allowed.

  • Within a ROTH IRA, dividends, interest, and capital gain growth are not taxable and if the account is the owner at least five years and the owner is over 59 ½ years in age, the money removed is actually tax-free.

  • There are no minimum distributions and withdrawal requirements after you cross 70 ½ years of age, unlike traditional IRAs.

  • One can withdraw a lifetime maximum of $10,000 without any taxes or penalties for a very first-time home purchase after the account is opened for 5 years.

  • One can withdraw the amounts contributed without tax or penalties at any age or for any reason.

  • Different investment choices for funds are available.

CONVERTING TO A ROTH IRA

  • Many IRA investors have the option to replace their regular IRAs with Roth IRA, available as of January 1998.

  • Investors are offered by deductible regular IRAs with a taxable-deductible contribution on funds going into regular IRA, while in regular IRA tax-deferred growth on all earnings and also taxable income when distributions are taken from regular IRA. On the other hand, ROTH IRAs offer investors a non-deductible contribution going into the ROTH IRA account, also the tax-deferred growth while in ROTH IRA and tax-free income.

  • You can withdraw from ROTH IRA tax-free if accounts are opened at least five years and the owner is over 59 ½ years old.  After the account is opened for 5 years, at any age one can withdraw a lifetime maximum of $10,000 without any taxes or penalties for the very first time. One can withdraw the amounts contributed without any taxes or penalties from ROTH IRA after the account is opened for 5 years.

  • There isn’t any requirement to ever withdraw from a ROTH IRA, unlike regular IRAs. Thus these accounts can be held until death and passed on to spouses, their heirs, or children on a tax-free package.

  • Conversion from a regular IRA to a ROTH IRA is not allowed when modified annual gross income reaches $100,000 (single filers and married couples filing jointly) or more per year during the conversion year.

You must understand your options just before transferring assets from an employer-sponsored retirement plan into an IRA and make a full comparison of the variations in guarantees and protections offered by each respective type of individual retirement account. Differences in loans and liquidity, fees, types of investments should be kept in mind.

CONTACT NATIONAL EDUCATIONAL SERVICES TO SPEAK WITH A FINANCIAL ADVISOR WHO CAN HELP YOU FIND THE BEST RETIREMENT ACCOUNT FOR YOU.

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