There are a lot of retirement account options out there, from employer-sponsored 401(k) accounts to individual retirement arrangements, better known as IRAs. Whether you have a retirement plan through your employer or not, an IRA can be a great way to boost your savings. Before you rush out to open one, it helps to understand a few basic IRA facts.
There Are Two Main Types
Most people can choose from two different types of IRA, either a traditional IRA or a Roth IRA. The big difference between the two is when you pay taxes on the amount you contribute. If you add money to a traditional IRA during the year, you can deduct the amount from your income, in most cases. If you add money to a Roth IRA, you can’t deduct the amount. But, when you go to take that money out in retirement, you don’t have to pay income tax on it or on any earnings that have accrued. You do pay taxes on the original amount you contributed to a traditional IRA, plus on any earnings, when you withdraw the money in retirement.
There Are Contribution Limits
You can’t funnel all of your money into an IRA. As of 2016, the most you can contribute to either type, per year, is $5,500. If you’re over age 50, you can contribute up to $6,500 each year, to help you catch up. It’s important to understand that if you have one of each type of IRA, a traditional and a Roth, that you can only contribute up to $5,500 per year, total, not per account.
They Aren’t For Everyone
Some IRA facts that are particularly useful to know is that not every person can open or contribute to them. You need to have earned income, such as from a job, to put money into an IRA during the year. Also, if you earn more than a certain amount (for 2016, more than $117,000 if you’re single or more than $184,000 if you’re married), you might not be able to contribute to a Roth IRA at all or might only be able to contribute an amount that’s lower than $5,500. If you have a job that offers a retirement account, and your income is above a certain amount ($61,000 if single and $98,000 if married, for 2016) you might be able to contribute to a traditional IRA, but you might not be able to deduct your contributions from your income.
There are Age Limits (Sometimes)
Since IRAs are retirement accounts, you’re meant to leave the money in there until you retire, which, according to the IRS, isn’t until age 59 1/2. If you take the money out of a traditional IRA before then, you can end up paying a 10% penalty tax, plus any income tax. There are some exceptions, though, such as if you use the money to buy a home or pay for college. You’re also able to pull out the original amount you contribute to a Roth IRA at any time, without penalty.
In the case of traditional IRAs, there is an age limit for making contributions. Once you turn 70 1/2, you can’t contribute to the account any longer, and you need to start withdrawing money from it.
Planning for retirement can be complicated, but it doesn’t have to be. If you want help figuring out which type of IRA is right for you or how to make the most of your retirement options, contact us today.
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