An Independent Retirement Account or IRA is a type of account that provides you with either tax free growth or tax deferral. The two most popular type of accounts are Traditional and Roth IRA’s. They’re packed with tax advantages and can be used even if you have a current 401K and best used when your employer doesn’t offer one (retirement savings is your priority).
The contributions you put into a Traditional IRA are considered to be pre-taxed income, meaning you have not paid taxes on this income yet. You’ll receive a tax deduction for the year you’ve contributed and pay taxes later when you withdraw at retirement.
You can begin making penalty free withdrawals at the age of 59 1/2 and your account must be five years old. Assumedly, when you’re at the withdrawal age and ready to “retire” your tax bracket will be lower and you’ll be paying less taxes for the money you contributed. Early withdrawals will trigger a 10% penalty and state taxes may apply.
The contributions made to a Roth IRA account are from post taxed income. Meaning that the income you contributed has already been taxed and you will not have to pay taxes at withdrawal. A Roth does not offer tax deductions or tax deferrals however, money contributed will grow tax free.
The withdrawal age for a Roth IRA is 59 1/2 and your account needs to be five years old. With a Roth IRA you can withdraw your contributions without a penalty – yes you read that correctly! There is an early withdrawal penalty of 10% if you withdraw the earnings made on your contributions like the interest, dividends, etc.
For 2019, your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000 ($7,000 if you’re age 50 or older). This means you can either contribute fully to one type of account (Roth/Traditional) or contribute in both for a total of $6,000.
Up to $10,000 can be withdrawn to purchase an eligible home and must be used within 120 days.
Some educational expenses for yourself and your immediate family are eligible.
If you’re disabled, you can withdraw IRA funds without penalty. If you pass away, there are no withdrawal penalties for your beneficiaries.
You can avoid an early withdrawal penalty if you use the funds to pay unreimbursed medical expenses that are more than 7.5% of your adjusted gross income (AGI).
If you’re unemployed for at least 12 weeks, you may withdraw funds to pay health insurance premiums for yourself, your spouse, or your dependents.
If you know your income was higher than usual this year and you’d rather save on taxes now, then fully invest in a Traditional IRA. If you’re just joining the workforce and aren’t making a “high” amount then a Roth IRA may be a better option for you. You can opt for free tax growth instead of tax savings on low income. I’ve ricocheted between the two to ensure the tax advantages benefited me the most. Before you fully commit to contributing to an account for that year, assess your situation and make a strategic decision!
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