Since no one can predict the future, the only thing you can do is plan for it. You work hard your entire life so that at some point you can have the choice to do what you want. That could mean kicking back and relaxing, sailing around the world, devoting yourself to your children, grandchildren or a worthy cause or even starting a whole new career. People who retire today can expect to live longer than their parents and grandparents, so here’s a good rule of thumb: live comfortably and plan accordingly. One option that can help you meet your retirement goals is an Individual Retirement Account (IRA).
An IRA is a stand-alone tax deferred account that enables you to save money for retirement. It can also act as an investment account that gives you a place in which to roll over any employer-sponsored retirement plan assets like from a 401(k) when changing jobs or retiring. Many people open IRAs in addition to any employer-sponsored retirement plans they might have to save for their futures.
You establish an IRA by opening an account through an insurance company, employer, a bank or financial services firm. Your contributions to the account can be made by depositing money from your savings periodically, through payroll deductions or by making a lump sum deposit. Most plans offer you a choice of various funding options including annuities, stocks, bonds and mutual funds tailored to different styles of investors. At age 59½ you become eligible to begin taking distributions from the account which, depending on the account type, may be taxed at that time. Generally there is a 10% penalty for withdrawing funds before you turn 59½.
While each type of IRA has unique benefits, the overwhelming advantage of all IRAs is their tax-deferred growth potential.
There are a number of different IRAs available, but for most people it comes down to a choice of two: the Traditional IRA and the Roth IRA.
Contributions made to this account may be tax-deductible, and any individual who has earned income, or whose spouse has earned income, may contribute as long as the IRA account holder has not reached age 70½ by the end of the contribution year.
Advantages to a Traditional IRA include:
The primary disadvantage to a Traditional IRA is if you are under age 59½ and decide you want to take distribution, you will have to pay an additional 10% tax along with regular income taxes.
Contributions to Roth IRAs are not deductible from current income, but earnings may generally be withdrawn tax-free as long as the account has been in place for at least five years and the distribution takes place after age 59½. Depending upon state law, Roth IRA distributions may be subject to state taxes. There is no minimum distribution requirement and contributions are still allowed after you reach age 70½.
Under certain circumstances you can convert some or all of your holdings in other IRAs to a Roth IRA, but bear in mind the converted amounts may be taxable as current income.
Advantages to a Roth IRA include:
Which IRA do you choose? It all depends upon your preferences.
| Traditional IRA | Roth IRA | |
|---|---|---|
| Who May Contribute | An individual who has earned income or whose spouse has earned income | An individual who has earned income or whose spouse has earned income |
| Age Limit | No age limit | No age limit |
| Income Limits to Make Contributions | No Income Limits | |
| 2022 Annual Contribution | $6,000 or 100% of employment compensation, whichever is less | $6,000 or 100% of employment compensation, whichever is less |
| 2022 Catch-up Contribution | Age 50 or older – $1,000 | Age 50 or older – $1,000 |
| 2022 Deduction Limit if Not Covered by Retirement Plan |
Single/Head of Household/Widower – No limit Married Filing Jointly or Separately with a spouse who is not covered by a plan at work – No limit. Married Filing Jointly with a spouse who is covered by a plan at work - $198,000. More than $204,000 but less than $214,000 - a partial deduction. No deduction if over $214,000. Married filing separately with a spouse who is covered by a plan at work – less than $10,000 income - a partial deduction. More than $10,000 income – no deduction. |
Not Deductible |
| 2022 Deduction Limit if Covered by Retirement Plan |
Single / Head of Household – $68,000 or less - full deduction up to the amount of your contribution limit. $68,000 but less than $78,000 a partial deduction. $78,000 or more - no deduction. Married Filing Jointly or qualifying widow – $109,000 or less full deduction. More than $109,000 but less than $129,000 - partial deduction. More than $129,000 - no deduction. Married filing separately – less than $10,000 a partial deduction. $10,000 or more no deduction. |
Not Deductible |
| Required Minimum Distributions | Begin the year in which the individual turns age 72. | None |
| Taxation of withdrawals | Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59 ½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception. | None if it’s a qualified distribution. Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½, you may also have to pay an additional 10% tax for early withdrawals unless you qualify for an exception. |
Participation in any company plan at any time during the year triggers the deduction phase-out rules tied to your adjusted gross income and filing status.
Yes you can as long as the total combined amount of your contributions don’t exceed the IRS maximum annual allowed amount.
As long as the child has earned income, they can contribute to a Minor IRA. It can be opened as a Traditional IRA or a Roth IRA. To establish a Minor IRA, the account must be opened and held by an adult, as guardian, in the name of the minor. While the guardian is authorized to perform transactions on the account, the minor is considered the registered owner for tax purposes
If you’re like most people, one of your most valuable assets you have is your earning power. An IRA can let you put that asset to work efficiently and effectively to give you added peace of mind during your retirement years. Even if you have other retirement plans in place, an IRA may still be a great benefit because of the added tax advantages it offers. The most important thing is to start now to make the most of the life you want later.
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