The traditional IRA provides a way to grow your investments free of federal income taxes until money is withdrawn. If you qualify, you may be able to deduct all or part of your contributions on your tax return and reduce your current taxes…but only if certain conditions are met. Your deductible contributions are taxed when you make withdrawals, at a time when many investors may be in a lower tax bracket.
If you're eligible, you can contribute annually to your IRA and if you're married and file jointly, you can also contribute to your spouse's IRA. You can contribute to your Traditional IRA if you're under 70½ and have earned income. Even if you're over 70½, you may contribute to a non-working spouse's IRA if the spouse has not reached age 70½. If you're over the age of 50, you can contribute more than younger investors, through a "catch up" provision.
When you are ready to open an IRA, be sure to check out the eligibility guidelines for contribution limits and deductibility of your investment.
A Roth IRA offers tax-free growth potential, but unlike a Traditional IRA, contributions to a Roth are not deductible from your current income tax. A Roth IRA may appeal to investors who believe they will be in a high tax bracket when they retire, since a Roth IRA may potentially reduce or eliminate taxes beneficiaries will have to pay after inheriting.
Roth IRA earnings may be withdrawn free from federal taxes under certain circumstances, if you abide by the rules. The tax-free distribution feature is one of the main differences between a Roth and a Traditional IRA. With a Roth, up to $10,000 in earnings may be withdrawn tax-free if used for a qualified first-time home purchase. Once you reach age 59½, you may qualify for tax-free withdrawals of both Roth IRA contributions and any accumulated earnings. In addition, the Roth IRA owner is never required to take distributions, making a Roth IRA an effective option for both estate and retirement planning purposes.
The Spousal IRA allows spouses without earned income and spouses who do not earn enough income to fund an IRA fully, to qualify for an IRA. This feature is the only difference between this IRA and the Roth or Traditional IRA which both require earned income. Spousal IRAs can act as a supplement to other retirement programs.
Contributions can be made either to a Traditional or Roth IRA, and contribution limits are the same as Traditional and Roth IRAs.
If you change jobs and receive a distribution from your 401(k) or 403(b) or company retirement plan, you have to decide what to do with that lump sum within 60 days of the date you receive your money to ensure that you don’t incur heavy taxes and penalties. You’ll also want to invest those funds for continued growth. One of the simplest, most flexible options is to roll the distribution directly into an IRA.
(You cannot directly roll your retirement account into a Roth IRA. You can roll your account into a traditional IRA and then convert it to a Roth IRA.)
Direct Rollover into an IRA
When you leave a job, you can move your retirement savings from an employer plan into an IRA through direct rollover. Your employer would directly transfer your funds into an IRA or send you a check that is payable to the financial institution housing your IRA. There is no required withholding.
Indirect Rollover into an IRA
When you leave a job, you can have your employer send you a check for your proceeds from your employer-sponsored plan. However, the employer is legally required to withhold 20% for income tax purposes. Be sure that you know the restrictions and rules related to this option. Once you receive the proceeds, you have only 60 days to put the funds in a different qualified retirement account to avoid penalties. If you fail to reinvest the distribution before 60 days, you pay a penalty, plus ordinary income tax on the distribution.
An Education IRA is designed specifically for funding higher education costs. Also referred to as a 529 Plan, these state-sponsored college savings plans allow you to make contributions into an account to pay those future costs. 529 Plans offer tax advantages to both the account owner and the beneficiary since no income taxes are paid on the earnings if the money is withdrawn for qualified educational expenses.
Contributions of up to $2,000 annually can be made for each child younger than 18. The non-deductible contributions won't be subject to a gift tax, and the accounts will be tax exempt. Distributions that don't exceed amounts spent on education will be tax free, but all or part of the excess not spent on education may be subject to taxes and penalties. Consult with a tax advisor to determine if a 529 Plan is right for you.
Important Facts on Retirement Plans
Certain information related to retirement accounts and savings plans may change each calendar year. For the latest information and the specific requirements, deductibility guidelines, tax advantages and benefits available to you, visit the IRS website. You should also consult your financial planner or tax advisor for help selecting the best options for you.
IRS Retirement Plan Information