We Know: All About IRAs
What is an IRA?
The Individual Retirement Arrangement is commonly known as an Individual Retirement Account, or IRA for short. An IRA is a personal retirement savings plan available to individuals who have earned taxable income during the year. The amount you contribute depends on the Adjusted Gross Income (AGI). Couples can contribute up to $4000 per year ($2000 for the spouse and $2000 for yourself). The tax-deductibility of contributions decreases as you reach an upper income limit. Additional contributions known as "catch-up" contributions can be made if your are over age 50. The earnings remain tax-deferred until the money is withdrawn, usually at or after the age of 59 1/2. Any withdrawals taken prior to the legal retirement age is subject to penalties.
How many different types of IRAs are there?
There are 11 different types of IRAs. They are:
Which individual retirement account should I choose: Roth or Traditional IRA?
The difference between the Traditional IRA and the Roth IRA is the point at which you'll pay the tax on your earnings. With the traditional IRA,you can make tax-deductible contributions to an account without paying for taxes until you withdraw the money. With the Roth IRA, your contributions are taxed up front, but any withdrawals made at or after the retirement age are not subject to taxes if you've maintained the account for at least five years. Roth IRAs are good for those who can't otherwise make tax-deductible contributions to a Traditional IRA. You can convert a Traditional IRA to a Roth IRA, but you'll have to pay taxes on the "withdrawn" amount from the old IRA.
How does a SEP IRA work?
SEP IRAs can only be established by the self-employed for themselves and their employees. Sole proprietors, business owners, or business partners in a business can put aside up to 25% of their self-employment income towards an IRA. The business must have made a profit for the SEP IRA to apply.
With the SEP IRA, you create IRAs for yourself and your employees and make contributions on behalf of your employees to each separate SEP IRA. Contributions must be made by April 15th in order to qualify for tax-deductible status. SEP IRAs do not require yearly contributions, and must be funded through a trust or custodial account. The earnings are tax-deferred until withdrawn at retirement.
Can I take money out of my IRA if I need it before I reach retirement?
Since the intention of an IRA is to provide individuals with savings for retirement, you are strongly discouraged from taking any withdrawals. If you need to make a withdrawal before you reach retirement, you'll be assessed a 10% excise tax plus the income tax for the amount disbursed, except if your withdrawal is for one of the following reasons: