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Understanding IRAs

Understanding IRAs

Friday, August 9, 2019

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Have you started saving for retirement? It is easy to get overwhelmed with all of the different options for retirement savings, including which account to choose.  If you haven’t started saving for retirement, it’s never too early or too late to start. While there are many ways to get started and save for retirement, we’re going to go over two main types of IRA accounts in this article - Traditional and Roth IRA (An IRA is an Individual Retirement Account). Both have different advantages.

Traditional IRA
A Traditional IRA is a retirement account that offers tax advantages to savers. If you are eligible for a tax deduction, your Traditional IRA contributions are deducted in the year they are made. Which could provide some savings to you in the immediate future. You only pay taxes on your money when you withdraw funds from your account. One advantage of this account is that your investments grow tax-deferred, meaning you won’t be taxed on the gains until you withdraw them.

Roth IRA
A Roth IRA is a retirement account where you’ve already paid taxes on the money you’re saving. You’ll often hear this being referred to as ‘after-tax’ contributions.  This means you will not pay tax on your Roth IRA withdrawals in retirement. Earnings can be distributed if a five-year waiting period has been met, and you are at least 59 ½ years old. A Roth IRA account also offers some additional perks allowing you to withdraw early if you are purchasing your first home, disability, or death.
 

 Traditional IRA vs. Roth IRA

  Traditional Roth
Eligibility You must be under 70 ½ years of age to contribute money.  No age restriction.
Contribution Limits If you are under 50 years of age, you can contribute up to $6,000, and if you are over 50, you can contribute up to $7,000. If you are under 50 years of age, you can contribute up to $6,000, and if you are over 50, you can contribute up to $7,000.
Catch-up Contribution Individuals 50 and over can contribute an additional $1,000 per year. Individuals 50 and over can contribute an additional $1,000 per year.
Minors Contribution Minors and spouses can both contribute to IRAs Minors and spouses can both contribute to IRAs
Contribution Deadline The deadline is typically April 15 of the following year. The deadline is typically April 15 of the following year.
 Withdrawals You can withdraw money at any time. However, fees and penalties may apply for early withdrawals.

You can withdraw money at any time. However, fees and penalties may apply for early withdrawals.

Taxes

Contributions may be deducted. Any contributions or earnings are taxable when withdrawing.

Offers tax-free growth and tax free withdrawals. There is no tax on withdrawals in a Roth IRA.

Income Limits Anyone with an income can contribute to a Traditional IRA. The tax deduction rate depends on what you earn. Single people with incomes less than $131,000 and married people with incomes less than $193,000 per year are eligible for Roth IRAs.
Income Caps Income caps cannot stop you from contributing to a Traditional IRA. In a Roth IRA, you may not be able to contribute due to income caps.
Minimum Required 
Distributions
In Traditional IRAs, minimum required distributions start at 70 ½. Roth IRAs do not require any minimum distribution during the life span of the owner.
Deduction on 
Contributions
You can deduct some or all Traditional IRA contributions. You cannot deduct your Roth IRA contribution.



IRAs, in general, are designed to help you save for retirement. Although, there are some differences between a Traditional and a Roth, both are options to consider when thinking about saving for retirement. For more tips on retirement, check out our article Retirement Planning Tips.

 

*Consult your tax advisor for any tax deductions, benefits, or for any other potential tax benefits regarding IRA accounts.