6 IRA Facts You Should Know
Many people have Individual Retirement Accounts. Here are six things you should know.
There are different types of IRAs. The two main categories are Traditional and Roth IRAs. There are also SIMPLE IRAs and SEP IRAs which can be valuable for small businesses and self-employed people, as a cost-efficient and tax advantaged way to save for retirement. SIMPLEs and SEPs have higher contribution allowances than Traditional and Roth IRAs.
There are no age restrictions for contributing to an IRA or a Roth IRA.
However, if you wish to contribute for a given tax year, you must have earned income, with one exception.
If you do not have earned income in a given year, you may contribute to either a Traditional or Roth IRA if your spouse has earned income and you file a joint tax return. This allows non-working spouses to save for retirement.
Contributions are different than conversions. A contribution is new money going into a retirement account in a given year. A conversion is taking money from a traditional IRA and “converting” it to Roth dollars, paying the income taxes due in the tax year of the conversion.
You are in charge of the investment line up in your IRA and may change the investments at any time. Unlike an employer sponsored plan where the plan sponsor selects the investment line up, you are in control of the investments that you choose within your IRA.
Saving for retirement can seem complicated in part because the rules are many. Learning one step at a time can make the task less daunting. You are now six steps ahead, as you have acquainted yourself with six IRA facts that you now know.
LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com TheWealthInformationLady.com SchulferAndAssociates.com
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Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Contributions to a Roth IRA are taxed in the contribution year. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
