What Is an IRA? Here’s What You Need to Know

 In Retirement, Tips

What Is an IRA? Here’s What You Need to Know

If you’re thinking about retirement planning, one option you may have heard about is an IRA.

According to the Pew Charitable Trusts, about 35% of private-sector workers don’t have access to an employer-sponsored retirement plan such as a 401(k).1

For those individuals, an IRA account offers an alternative way to save and invest. And even if you do have a retirement plan at work, you may be able to set up an IRA for additional savings.1

Let’s take a look at some important information you’ll need to know if you’re thinking about opening an IRA.

How Does an IRA Work?

An individual retirement account is a type of account that offers tax incentives for investing money in retirement savings.2

  • You may add funds to the IRA over time.
  • Money in the account may be used to purchase investment products such as individual stocks, mutual funds or bonds.
  • Starting at age 59 ½, funds may be withdrawn from the account to provide a source of retirement income.

An IRA offers many important characteristics:2

  • Annual IRA contributions are tax-deductible within certain limits.
  • Most individuals who are under 50 may contribute up to $5,500 per year.
  • Those 50 and older may contribute up to $6,500 per year.
  • If investments grow in value, earnings are tax-deferred, which means you pay no taxes as long as the money stays in the account.

What About IRA Tax Benefits?

The deductibility of IRA contributions depends on the type of account you choose — such as either a traditional or Roth IRA.

In addition, there are other factors that will impact how much your contributions affect your tax bill:3

  • Your income level
  • Whether you are also covered by a retirement plan at work
  • Whether you are single or married filing jointly
  • Whether your spouse is covered by a retirement plan at work

What Are the Different Types of IRA Accounts?

As noted above, the type of IRA you choose can affect your tax bill — both during the year in which contributions are made and the year you begin withdrawing income from the account.

  • Traditional IRA. With a traditional IRA, contributions are made on a pre-tax basis, while future withdrawals will be subject to taxation. Many people choose this option if they expect their retirement tax rate to be lower than their current tax rate.2
  • Roth IRA. If you choose a Roth IRA, contributions are made from after-tax dollars, meaning you can’t deduct them from your taxable income for the current year. However, withdrawals made in retirement will not be taxed at all. People often choose this option if they expect their retirement tax rate to be higher than their current tax rate.2

Do you have questions about retirement planning? Are you thinking about setting up an IRA?

Contact The Resource Center. We’ll answer your questions and help you choose the retirement savings plan that best suits your needs.

 

Written by Sarah M. Smith

Sources:

1 – Steiner, Sheyna. Bankrate. September 7, 2017. IRA accounts for beginners: Everything you need to know. https://www.bankrate.com/investing/ira/all-about-ira-accounts-for-novices/. Accessed on January 2, 2018.

2 – Yochim, Dayana. Nerd Wallet. July 7, 2017. IRA: What it is and how to get started. https://www.nerdwallet.com/article/learn-about-ira-accounts. Accessed on January 2, 2018.

3 – IRS. 2017. 2017 IRA Deduction Limits. https://www.irs.gov/retirement-plans/ira-deduction-limits. Accessed on January 3, 2018.

 

Visit our YouTube page for more videos 

Ozarks Live Logo

We are not permitted to offer, and no statement contained herein shall constitute, tax or legal advice. Individuals are encouraged to consult with a qualified professional before making any decisions about their personal situation. We are able to provide you with information but not guidance or advice related to federal benefits. Our firm is not affiliated with the U.S. government or any governmental agency.  Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and The Resource Center are not affiliated companies.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. The Resource Center is not affiliated with the US government or any governmental agency. AW01181070

 

 

Recent Posts

Start typing and press Enter to search