Individual Retirement Accounts
An Individual Retirement Account (IRA) is but one of the vehicles than one may use towards saving for retirement. Both the Traditional IRA and Roth IRA are individual retirement accounts in the United States. It is also an alternative to those individuals who may not have an employer-sponsored retirement plan.
Read more on the Traditional IRA and Roth IRA below:
About the Traditional IRA
- Contributions are tax-deductible.
- If a taxpayer expects to be in a lower tax bracket in retirement than during the working years, then a traditional IRA offers an increased incentive over the Roth IRA.
- The tax benefit is realized immediately.
- There are eligibility requirements for the tax-deductibility. If one is eligible for a retirement plan at work, one’s income must be below a specific threshold for your filing status.
- All withdrawals from a Traditional IRA are included in gross income and subject to federal income tax.
- At age 70½, forced distributions from a Traditional IRA must commence. If an investor fails to make the required withdrawal, half of the mandatory amount will be confiscated by the IRS.
- In addition to the distribution being included as taxable income, the IRS will also assess a 10% penalty for early distribution if the participant is under age 59 ½. The IRS will waive this penalty with some exceptions, including first time home purchase, higher education expenses, death, disability, un-reimbursed medical expenses, health insurance, annuity payments and payments of IRS levies, all of which must meet certain stipulations.
About the Roth IRA
- Established in 1998.
- Contributions are not tax-deductible.
- At any time, the Roth IRA owner may withdraw up to the total of his or her contributions without tax or penalty Earnings withdrawals become automatically qualified in the tax year the participant reaches age 59 ½, or becomes disabled, so long as the account has been established for five or more years.
- If the Roth IRA owner expects his or her tax bracket after retirement to be higher than before retirement, there is a tax advantage to making contributions to a Roth IRA over a traditional IRA. There is no current tax deduction, but money going into the Roth IRA is taxed at the lower current rate, and will not be taxed at the higher future rate when it comes out of the Roth IRA. Therefore, the Roth IRA offers a specific advantage where a person will retire in a higher tax bracket than that used during his or her pre-retirement years.
- Roth IRAs are not required to force distributions upon the age of 70 ½,, as is required with other tax-deferred retirement plans.
- With a Roth IRA, there are heavy penalties for early withdrawals of earnings (withdrawals up to the total of contributions + conversions are tax-free). An unqualified withdrawal of earnings will result in federal income tax, plus a 10% penalty on the amount.
- There is a risk that Congress over the next few decades may decide to tax earnings on
- Roth IRAs.
If you would like to set up an IRA, please feel free to contact our office.