The ABCs of IRAs

The ABCs of IRAs

If you want to retire someday, and enjoy a comfortable lifestyle when you do, consider opening an individual retirement account (IRA) now.

Published Saturday, August 1, 2015

The ABCs of IRAs

If you want to retire someday, and enjoy a comfortable lifestyle when you do, consider opening an individual retirement account (IRA) now. There are several types of IRAs but the two most common are traditional IRAs and Roth IRAs. Both offer excellent tax advantages, as well as the benefit of compounding interest on the money you contribute to your account. But they also have some restrictions, such as contribution limits and penalties, to think about as you decide which type of IRA is best for you.

Advantages

Traditional IRAs allow you to receive a tax deduction on the money you contribute to your account each year. The only time the money in your account is taxed is when you withdraw it.

With a Roth IRA, the money you contribute to your account is not tax-deductible. However, the growth, or wealth, on your money in the account is tax-free. These rules can change from year to year so be sure you understand which types of withdrawals or distribution of funds are considered “qualified” so you can avoid being taxed.  

Beware

Penalties for both types of IRAs occur if you withdraw money from your account before you reach 59 ½ years of age. Typically you will pay an additional 10% penalty tax for early withdrawals unless you meet the rules of exception.

Contributions

While contribution limits change each year, they are the same for both traditional and Roth IRAs. According to the IRS, for 2015, the most you can contribute to all of your traditional and Roth IRAs is the smaller of:

  • $5,500 (or $6,500 if you’re age 50 or older by the end of the year); or
  • Your taxable compensation for the year

Contributions can be made up until your tax return filing deadline for the year.

For more information about IRAs, visit the following websites.

http://www.irs.gov/Retirement-Plans/Plan-Sponsor/Types-of-Retirement-Plans-1

http://www.rothira.com/traditional-ira-vs-roth-ira

 

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