Corny, I know 🤦♀️🤷♀️. But let’s talk about IRAs. IRAs can be used to supplement social security in retirement, but tax law changes now allow use of IRAs for situations besides retirement. IRAs are accessible to individuals in all tax brackets.*
IRAs can reduce taxes by reducing taxable income. Contributions are optional (subject to custodian minimums*) and the account remains under the account beneficiary’s control from account opening; and unlike 401k plans, your IRA account is non-forfeitable (fully vested) and is not affected by job changes*. You also are able to decide upon IRA account investment choices* (with some exceptions*) in the account. IRAs can be annuitized so that you do not outlive the income stream*. IRAs can also be inherited.*
Who can establish an IRA?
Although there are various contribution limits, anyone with earned income can establish an IRA*, with some exceptions that are based upon your (and your spouse’s) participation in an employer plan, tax filing status, and your income level. Income limitations and phaseouts (as of the date of this blog post) can be found here.*
Types of IRAs*
| Traditional | Pre-tax contributions; taxed withdrawals* |
| Roth | After-tax contributions; tax-free withdrawals with conditions met* |
| SEP | Simplified Employee Pension program |
| SIMPLE | Savings Incentive Match Plan for Employees |
| Inherited | An IRA inherited by a named beneficiary |
| IRA Annuity | An IRA annuitized into a stream of lifelong income |
| Deemed IRA | Separate account within a retirement plan |
| IRA Rollover | IRA established with funds rolled over from an employer plan |
| Spousal IRA | IRA established on behalf of a spouse having no taxable income |
| Self-Directed IRA | An IRA that can hold alternative investments |
How much can be contributed to an IRA?
Contribution limits change with tax laws. Current contribution limits (current as of the date of this blog post) can be found here.*
You may split your contributions between Roth IRA and a traditional IRA provided your total contributions to all IRAs do not exceed annual contribution limits nor your annual compensation (whichever is less); however, rollover contributions from employer plans are excluded, and contributions to SEP and SIMPLE IRAs are subject to different contribution limits*.
If you are over 50 years of age you are allowed to make what are called ‘catch-up contributions.’ Catch-up contribution amounts (current as of the date of this blog post) can be found here.*
Are contributions deductible?
Traditional IRA contributions are tax deductible*. Roth IRA contributions are made with after-tax dollars and are therefore non-deductible*.*
Are the account returns taxable?
Earnings in the form of dividends, capital gains and interest are allowed to grow tax-free in both traditional and Roth IRAs; both the contributions and account growth (so entire withdrawal amount) is taxable upon withdrawal from traditional IRAs; but only the growth portion of Roth IRA withdrawals are taxable.*
When are early withdrawals allowed?
Withdrawals taken from traditional IRAs prior to age 59 1/2 are subject to taxes plus a 10% penalty except under certain circumstances*. Roth IRA withdrawals are tax-free and penalty free*.*
Note: This post will be updated, so please check back! Want 4 ideas that may maximize your tax refund? Check out this video podcast – 4 Ways to Spend (MAXIMIZE) Your Tax Refund!
Stay encouraged ❤️!
Shelly
*DISCLAIMER: The information provided in this post and throughout this site is being provided for general education, information, and commentary purposes only and does not constitute and is not to be construed as financial, investment, tax, nor legal advice. Please seek a financial advisor, attorney, and accountant for advice appropriate for your personal situation. You assume all liability for any risk that may be associated with application of any information contained on this site.*