There are a smorgasbord of investments to choose from when planning for retirement. The Traditional IRA and Roth IRA are amongst the easiest ones to set up and manage. An “IRA” is a fancy acronym for an Individual Retirement Account. Depending on your personal situation, you may want to choose contributing to a Roth over a Traditional, or vice versa. Below are some of the general characteristics describing both types of IRAs.
- Contributions to your IRA are deductible on your personal income tax return in the year that you make them
- At 70 ½ years old, you are required to start taking a minimum annual distribution
- Early distributions (before the age of 59 ½) require you to pay an additional 10% tax
- Contributions to your IRA are not deductible on your tax return in the year that you make them
- There is no requirement to take out a minimum annual distribution at any time in your life
- Receive tax free distributions from your account after the age of 59 ½
For both types of IRA’s you must have taxable income to be allowed to contribute to a plan. Contributions are limited to $5,500 a year, and the threshold increases to $6,500 if you’re 50 or older by the end of the year.
There are many rules regarding IRAs, so it is important to ask questions before choosing which type is right for you. Additionally, it is important to consult your tax advisor before taking any contributions out of your IRA account. The tax effects could be major savings if done right; however, if done wrong you may end up owing Uncle Sam. For further information please see the IRS website.