Individual Retirement Account Basics

An Individual Retirement Account (IRA) is a personal savings plan that allows you to save money for retirement with tax advantages.

There are a few types of IRAs but let’s focus on Traditional and Roth IRAs. Based on what you choose, you may be able to deduct some or all of your contributions, and may be eligible for a tax credit equal to a percentage of your contribution.

The difference between the two types of IRA is as follows:

Traditional IRAs, offer tax deductible contributions, if you are eligible. Your earnings grow tax-deferred, meaning you do not pay income taxes on your earnings until the money is withdrawn. At that time, you are taxed based upon your regular income tax rate. Once you reach age 72, traditional IRAs do require a minimum amount to be distributed from your IRA yearly.

Roth IRA contributions are never tax-deductible so they will always be tax-free upon distribution. Your earnings grow tax-deferred, so you will not pay income taxes on your investment earnings until you make withdrawals. And, if you take a “qualified distribution” your earnings are tax-free. Roth IRA owners do not have to take required minimum distributions when they reach a certain age.

You can contribute to a Roth IRA if you have eligible compensation below or within the modified adjusted gross income (MAGI*) limits.

Click here to learn more or open an IRA today.

Source: https://www2.iraservicecenter.com/