Which IRA is right for you?

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By Morgan Lavender, Modern Woodmen

If you are like many Americans, most financial terms and acronyms can be confusing.  This is one question I get quite often: “Which IRA is right for me?”  To start off, an individual retirement account (IRA) allows you to save money for retirement in a tax-advantaged way. An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis.    For today we will discuss two types – the Traditional IRA and the ROTH IRA.

Both of these types of IRA’s allow you to control the timing and amount of your contributions, and how the money is invested.  Additionally, you can use both types of IRA’s to receive eligible distributions from employer sponsored retirement plans.    There are specific benefits to each type of plan, but the contribution limits are the same.   They can change each year, but for 2021 if you are under 50, you can contribute up to $6,000.00.   Age 50 and older can contribute up to $7,000.00.   These amounts cannot exceed the amount of earned incomed received during the year, and this Is a combined limit that applies to all IRA’s held by an individual.    If you do participate in a retirement plan at work, such as a 401(k), that does not exclude you from contributing to an IRA…. giving you an additional way to save!

Traditional IRA’s- you may be eligible to make contributions that qualify for an income tax deduction that can reduce the amount of your taxable income for that tax year (consult your tax advisor).  Your income does NOT affect your ability to contribute.

ROTH IRA’s – You may qualify to receive income tax free withdrawals from a ROTH IRA if IRS guidelines are met.   You have income tax-free access to contributions at any time.   Contributions are not subject to income taxation and are withdrawn before taxable earnings.   Your income DOES determine your ability to make a contribution to a ROTH IRA.    Below is a link to the IRS where you can determine eligibility and deductibility based on income.

https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras

Here are some commonly asked questions I get regarding IRA’s:

How do I qualify for income tax-free

withdrawals from a Roth IRA?

Meet both of the following qualifications.

  1. Hold the money in your Roth IRA at

least five tax years (not necessarily five

calendar years).

  1. Have one of these events occur:
  • Reach age 59½.
  • Disability.
  • Death.
  • Use the withdrawal for a qualifying first-time home purchase ($10,000 lifetime limit).

 

How are withdrawals from a Traditional IRA taxed?

Withdrawals from a Traditional IRA are subject to ordinary income taxes.

 

Are there penalties for withdrawals received before age 59½?

Taxable distributions you receive from an IRA before age 59½ are subject to a 10 percent IRS

premature distribution penalty. This penalty is in addition to any ordinary income taxes.

The 10 percent penalty may not apply if a withdrawal occurs due to certain exceptions

 

When will I have to start receiving required minimum distributions?

Traditional IRAs

  • You must start taking required minimum distributions by April 1 of the year following the year you reach age 72.
  • Required minimum distributions are subject to ordinary income taxes and are not eligible for a rollover to another retirement plan or IRA.

Saving money is good, and this is a great way to start or supplement your retirement savings plan.   Everyone’s situation is different, so consult a financial professional to see which one may be right for you and your family.

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