Retirement and taxes: Understanding IRAs

Individual Retirement Arrangements, or IRAs, provide tax incentives for people to make investments that can provide financial security for their retirement. These accounts can be set up with a bank or other financial institution, a life insurance company, mutual fund or stockbroker.

Here’s basic overview to help people better understand this type of retirement savings account.

  • Contribution. The money that someone puts into their IRA. There are annual limits to contributions depending on their age and the type of IRA. Generally, a taxpayer or their spouse must have earned income to contribute to an IRA.
  • Distribution. The amount that someone withdraws from their IRA.
  • Withdraws. Taxpayers may face a 10% penalty and a tax bill if they withdraw money before age 59 ½, unless they qualify for an exception.  
  • Required distribution. There are requirements for withdrawing from an IRA:
    • Someone generally must start taking withdrawals from their IRA when they reach age 70½.
    • Per the 2019 SECURE Act, if a person’s 70th birthday is on or after July 1, 2019, they do not have to take withdrawals until age 72.
    • Special distribution rules apply for IRA beneficiaries.  
  • Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.  
  • Roth IRA. This type of IRA that is subject to the same rules as a traditional IRA but with certain exceptions:
    • A taxpayer cannot deduct contributions to a Roth IRA.
    • Qualified distributions are tax-free.
    • Roth IRAs do not require withdrawals until after the death of the owner.
  • Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.  
  • Simplified Employee Pension. This is known as a SEP-IRA. An employer can make contributions toward their own retirement and their employees’ retirement. The employee owns and controls a SEP.  
  • Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.

https://bit.ly/3mvb1LR

Want important updates direct to your inbox?
Yes, please! New and timely information to keep you informed about tax, financial strategy, and business. 
Thank you for subscribing!

You may also be interested in

The Augusta Rule: Your Secret Tax-Saving Strategy

The Augusta Rule: Your Secret Tax-Saving Strategy

By Gentry SproutDirector of Tax & Advisory Services Have you heard of the Augusta Rule? This is something we get questions about frequently, so let’s unravel the mystery of the Augusta Rule and how it can be a game-changer for your tax strategy. This rule might...

read more

Empowering entrepreneurs to grow their business.

Download your free guide today, and get back in the driver’s seat of your business and your life.

Entrepreneurial Success Formula: How to Avoid Managing Your Business From Your Bank Account