If you’re thinking about setting up an IRA or simply want to know more, here’s the lowdown.
In a nutshell, an IRA, or Individual Retirement Account, is a type of saving account designed to help people save for retirement and offers many tax advantages. There are two different types of IRAs; traditional and Roth IRAs. One major difference between a Traditional IRA and a Roth IRA is the type of tax benefit each delivers. You won’t receive deductions for contributions with a Roth IRA, but if you follow all the rules, your investment earnings will be distributed tax and penalty free in retirement. Traditional IRAs can provide a deduction for contributions and delay taxes on investment earnings until funds are withdrawn, typically in retirement.
If you choose to do so, you can contribute to both a Traditional and a Roth IRA in the same year, as long as the combined total contribution does not exceed your limit for the year. If you are under 50 years old you can contribute up to $5,500 in 2017 and if you’re 50 years of age and over you can contribute up to $6,500. Therefore, the total amount a person under 50 can contribute to both a Traditional and Roth IRA combined cannot exceed $5,500 per year.
Before you reach age 59 1/2, you may owe a 10% IRS tax penalty in addition to federal and state taxes on distributions from Traditional IRAs and withdrawals of earnings from Roth IRAs. However, Roth IRA contributions can be withdrawn at any time without tax or penalty. If IRS requirements are met, distributions from Traditional and Roth IRA earnings are penalty-free under these circumstances: death, disability, qualified first time home buyer (lifetime limit of $10,000), eligible medical expenses, certain unemployed individuals’ health insurance premiums; substantially equal periodic payments, qualified higher education expenses, Roth conversions, qualified reservist distribution or IRS levy. Speaking with a tax advisor to determine the best type of IRA for you is recommended.
If you have further questions about Traditional and Roth IRAs, get in touch with us at Warren-Boynton State Bank in New Berlin or Springfield.