Individual Retirement AccountsTraditional and Roth
Individual Retirement Account,
commonly known as IRA for its acronym, is a good option to consider when you
are planning for retirement since it is a saving account with attractive tax
advantages. IRAs are recommended if your employer does not offer any retirement
plan like a 401(k) or if you want to have an additional plan to save more for your
IRA can be opened in any bank or
brokerage firm, either in person or online. The opening process is very simple
and only requires having your social security number and beneficiaries as well
as your basic personal information.
There are several types of IRAs, but
the most used ones are traditional IRA and Roth IRA.
The traditional IRA is an excellent
choice for anyone who wants to save for retirement and reduce the taxes at the
In most of the cases, the money you
contribute to this type of account can be deducted from your annual taxes. All
these contributions, plus earnings are tax-free until you start making
For example, if your income is
$30,000 in the year and you contribute $2,000 in IRA, you only pay taxes on the
$28,000 while $2,000 in IRA will grow in your free tax bill until retirement.
Consider that if your income exceeds
a certain limit, the contributions will not be tax deductible.
For you to be eligible for a
traditional IRA, you must receive income that is taxable in the year and less
than 70½ years old at the end of the year.
You can start making withdrawals
after age of 59½ years old and they will be subject to ordinary income tax
rate. If you make early withdrawals, they are also subject to 10% penalty, plus
applicable taxes application.
The tax laws require traditional IRA
to make a required minimum distribution to the beneficiary after 70½ years old.
Unlike traditional IRA, the
contributions that you do in Roth IRA are not tax deductible, but on reaching
retirement all your withdrawals are tax-free. In addition, for this type of
account there is no age restriction.
Another difference is that in Roth
IRA, your eligibility depends on your level of adjusted gross income.
If you declare your taxes
individually and your adjusted gross income does not exceed $122,000.
If you do your tax returns together and
your adjusted gross income does not exceed $179,000.
The funds are available for
withdrawal once you reach 59½ years of age, as long as the account has been
established and has provided for a minimum of five years. Likewise, all early withdrawals
are subject to a penalty of 10%.
Minimum Distributions Are Required In Roth IRAs.
In short, the traditional Roth
accounts allow postponing taxes on your savings while Roth IRA exonerates your
tax savings. Each option has advantages and disadvantages that you should
consider before choosing the type of retirement account you are about to open
and much depends on your current situation and your long term goals. Therefore,
it is recommended that you hire the retirement plan administration services at www.JoinWestern.com to make it a better and safer deal
for your future.