IRA rules are important to make smart contributions in the retirement accounts. Retirement accounts provide tax advantages that professionals can benefit from at the time of retirement. However, saving up in retirement accounts can be confusing. Knowing the basic rules can considerably help in making the right decisions for business owners. Moreover, there are different types of retirement accounts providing different benefits. Therefore, it would be a nice idea to have a basic knowledge about each of them before opting for one.
An Individual Retirement Account or IRA is a type of investment vehicle to identify and invest funds for retirement savings. These accounts generally provide tax benefits to an individual offering either tax-free or tax-deferred growth. Usually, there are two main types of IRA accounts, Traditional IRA and Roth IRA. Of course, there are different rules for each one of them. Abiding by these rules would help in gaining the maximum retirement benefits. We would go through them one by one.
Individuals who are under the age of 70 and 1/2 years at the end of the calendar year can apply for Traditional IRA. The “standard” contribution limit for a Traditional IRA is $5,500. Individuals who are over 50 years can make an additional catch-up contribution of $1,000. This contribution limit is however subject to inflation rates.
Saving money in a Traditional IRA is tax free. This means that the money invested through or saved in a Traditional IRA is not tax deductible. However, once the withdrawal starts, normal income taxes are applicable.
While Roth IRA contributions are not tax deductible, the same is not true of traditional IRAs. The traditional IRA deduction limit will vary based upon whether or not you have a retirement plan with your place of work. If you are not covered by a company retirement plan, you are allowed the full deduction. However if you do have a retirement plan at your company, or your spouse does, your tax deduction may be affected if you make over a certain amount of money. This is an important factor to consider when making the choice between a traditional IRA vs a Roth IRA.
Additionally, with a Traditional IRA, account holders are not allowed to withdraw money before they reach 59 and 1/2 years. Otherwise there would be an additional 10% IRS early withdrawal tax. There are exceptions for disability and other emergencies including, qualified higher education expenses, qualified first time home purchase, health insurance premiums and others. Traditional IRA is a great retirement package for individuals seeking tax deductible retirement funds. Retirement funds are not optional, like family heritage insurance, they are a must for everyone.
Roth IRA do not require any stringent eligibility criterion. The maximum contribution that can be made for a Roth IRA is $5,500 with provision for an additional catch-up contribution of $1000 for individuals above 50 years of age.
Withdrawals are tax free after the qualification period with Roth IRA. However, for withdrawals before the qualification period, the same rule as Traditional IRAs apply. Account holders would be charged an early tax penalty of 10%. The qualification period to avoid this penalty is at least 5 years or till the account holder reaches 59 1/2 years. The exception rules are same as an Traditional IRA.
Income Level Limits
Roth IRA can be a great retirement fund for tax-free withdrawals. However, there is a maximum income limit to apply for Roth IRA. For single filers in 2016, the income range has been estimated at $117,000–$132,000 and for married filers (joint), the range is $184,000–$194,000. Apart from that, Roth IRA can be one of the safest retirement plans.
Saving up for the future through IRA can be easy. Understandably, with the hectic work schedule and the stress, filing for and maintaining an IRA can be confusing at first. But, the IRA rules are pretty simple to follow. One should carefully go through the eligibility criteria and the contribution limits at first, to file for the suitable plan. There are great tax advantages that would be hard to miss. Before deciding between these two retirement accounts, consult your decision support system to aid you in making the right choice.
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