By: Jeremy Skoglund, VP Trust Officer
IRA is one of those acronyms we throw out with the expectation that everyone knows what they are. Like I mentioned in my last post, I apologize to those that don’t know the lingo. Our intent is not to make you feel ignorant. An IRA is an Individual Retirement Account and can be a great option whether you have a retirement plan through work or not.
There are two main types of IRAs, Roth and Traditional. While there are a few similarities between these types of IRAs, they have many differences. One of the few similarities has to do with the amount you can contribute, which is $5,500 in 2018 or $6,500 if you are at least 50 years old. That’s about where the similarities end.
1. Tax Breaks
Contributions you make to a Traditional IRA can be tax-deductible, which means you will not pay taxes on your contributions. When you start withdrawing funds in retirement from your Traditional IRA, you will pay taxes at that time. Contributions you make to a Roth IRA are known as after-tax contributions. You don’t get any tax benefits up front, but when you begin withdrawing funds, you do not pay any taxes.
With a Traditional IRA, you are required to start taking required minimum distributions (RMDs) at age 70 ½. If you fail to take an RMD, you will be hit with a hefty penalty from the IRS. Also, if you want to take a withdrawal prior to turning 59 ½, there will likely be a 10% early-withdrawal penalty. With a Roth IRA, you never have to take withdrawals and, if you need, you can take a withdrawal prior to turning 59 ½ without any penalty as long as it is only the money you contributed and not funds from earnings or IRA conversions. There is a stipulation that you have to wait at least five years since you first invested in any Roth IRA to begin taking withdrawals.
3. Income Limits
If you have earned income and are under the age of 70 ½, you qualify to contribute to a Traditional IRA. However, if you participate in your employer’s retirement plan (i.e., 401k), you may not get the full upfront tax break based on what your income level is. Roth IRA contributions, on the other hand, have income limits. If you’re lucky enough to have a higher income, the government does not allow you to have a Roth IRA.
If you would like to know what those income limits are or you have other questions about IRAs, please contact our IRA specialists: