What is an IRA account?
An IRA (Individual Retirement Account) is an investment account for your retirement. Unlike a 401K, an employer-funded retirement plan, you may withdraw money from your IRA account whenever you want to once you reach an eligible age. As an IRA savings account, it comes with tax savings. The best IRA accounts have a different tax benefit for you to choose from.
There are two main types of IRA accounts: Traditional IRA and Roth IRA.
Age requirements: To contribute, you must be under age 70 1⁄2. For withdrawals, if you are under age 59 1⁄2, you will be subject to a 10% early distribution tax penalty on any taxable IRA savings withdrawn. When you reach 70 1⁄2, traditional IRA owners are required to take minimum annual distributions.
Tax benefits: The traditional IRA has a possible tax credit of up to $1,000.00 when you contribute. Furthermore, earnings on the funds are tax-deferred; you won’t pay taxes until you withdraw funds from the account. As a tax-deductible contribution, you don’t pay taxes until you remove the money from the IRA. If you or your spouse do not actively participate in an employer-sponsored retirement plan, then you’re eligible to deduct your full contribution. Otherwise, you’ll need to refer to the MAGI limits (MAGI-modified adjusted gross income) to determine how much can be your deductible contribution. Any non-deductible contributions are tax and penalty-free.
Eligibility requirements: You or a spouse filing jointly must show earnings/compensation from employment.
Contribution limit: Each tax year sees a new adjustment to the contribution limits. 2020 annual contributions limit is $6,000.00 with an additional $1,000.00 if over the age of 50.
Age requirements: You are never required to take money out of your Roth IRA, no matter your age. However, there are penalties if you do make a withdrawal and it’s not considered a qualified distribution. If you take money out before the age of 59 1⁄2, you’ll be subject to a 10% early distribution tax penalty on any taxable amount withdrawn, unless you qualify for a penalty-free early distribution. You would qualify for a penalty tax exemption if you have owned the account for more than 5 years, you are disabled, a first-time home buyer, or are a Roth IRA beneficiary.
Tax benefits: With a Roth IRA, you may also qualify for a possible tax credit of up to $1,000.00 when you make a Roth IRA contribution. You can withdraw from a Roth IRA account at any time, penalty-free, as long as it’s a qualified distribution. Earnings are tax-deferred, which means it’s taxed when you withdraw the money. If it’s a qualified distribution, you can remove IRA savings tax-free. A Roth IRA withdrawal is not tax-deductible.
Eligibility requirements: You or a spouse filing jointly must show earnings/compensation from employment. Together your earned income must be less than IRS limits. Single, your modified adjusted gross income must be less than $124,000.00 for a 100% contribution in 2020. This amount is up from $122,000.00 in 2019.
Contribution limit: Each tax year sees a new adjustment to the contribution limits. The 2020 annual contributions limit is $6,000.00 with an additional $1,000.00 if you’re over the age of 50.
Retirement plan in action.
You have worked so hard to build a life for yourself. An IRA account is your retirement plan for when the money flow stops. With the best IRA accounts, you’ll be able to enjoy your life while reaping the rewards of retirement. Often, you’ll have more time to enjoy things you couldn’t while holding down a career.
Retirement accounts are your income after retirement. You start building your portfolio now so that you have enough saved to replace your income loss when the time for retirement comes. As an investment account, it is often best to diversify your assets among stocks, bonds, and cash. Stocks provide high growth potential. Bonds and cash provide long-lasting protection against stock market dips and a bear market trend. The important part about building up the account in an IRA instead of a traditional savings account or deposit accounts is that IRA retirement accounts have tax benefits. We encourage you to speak with a trusted financial planner to figure out your best options.
How much do I need to save for retirement?
One rule of thumb is beginning at the age of 25 to save at least 15% of your pre-tax salary for retirement. Another popular calculation aims to replace 70% – 90% of your annual pre-retirement income each year until retirement age. By the retirement age, you’ll need to have saved enough to live on in your savings, asset allocation, and social security benefits. Save upwards of 1 to 1.5 million dollars.
To understand how valuable saving with an IRA is, click here to use an IRA savings calculator. You’ll be able to see the differences in growth depending on when you start and what your interest rate is. See our current IRA rates online.
What happens to my IRA savings after I die?
In case of death, you may designate beneficiaries to claim your individual IRA account assets after your death. Any tax-deferred money in a traditional IRA account at the time of death is taxable to your beneficiary upon distributing the inherited IRA funds. A Roth IRA account differs if you held the account for over five years. In this case, the inherited IRA Roth account distributions to your beneficiary are tax-free.