The Facts about IRAs
Everyone dreams of a retirement free from financial worries.
Many people are behind schedule when it comes to planning for retirement. If you're among them, consider an Individual Retirement Account (IRA).
Did you know…
- Retirement can last for 30 years or more?
- 64% of workers expect to have some reitrement income from an IRA?1
- The average amount paid monthly by the Social Security Administration in the form of benefits is $1,237 for a retired worker?2
An IRA can be an important part of your retirement plan. Since almost anyone who has earned income can open an IRA, it’s something you should seriously consider.
IRAs enjoy special tax advantages, but the rules can be confusing. This article can help explain some of the basics.
- There are limits on how much you can contribute to your IRA each year. Those limits are raised periodically (in 2013, the limits are $5,500 for people under 50 and $6,500 for people 50 and older).
- The deadline for making a contribution to an IRA for the year is the due date of your tax return, not including any extensions of time to file. However, to maximize the time for potential growth of your IRA contribution, it makes sense to make it at the beginning of the year.
- You don’t have to contribute the maximum amount to an IRA.
There are two types of IRAs for individuals – Traditional and Roth.
1) Traditional IRAs
- To contribute to a Traditional IRA, you must have earned income and be under age 70 ½.
- You can also make a contribution on behalf of your non-working spouse if your spouse is under the age of 70 ½ and you file a joint tax return.
- The tax deductibility of your contribution depends on your income, filing status, and the status of your participation in your employer’s plan. Even if you don’t quality for the tax-deductible status of a Traditional IRA, you can probably still contribute to one.
- Your contributions are tax-deductible, and your earnings grow tax-deferred until withdrawn.
- You must take a required minimum distribution starting at age 70 ½. If your IRA was tax-deductible, your distribution will be considered part of your income for the year the distribution was made.
- You can begin distributions without penalty as early as age 59 ½.
- If you need to withdraw money before age 59 ½, a 10 percent penalty could be imposed except in special cases.
A Traditional IRA might be a good choice if…
- You meet the criteria for a tax deduction.
- You think you’ll be in a lower tax bracket when you retire.
- You don’t qualify for a Roth IRA. You can still take advantage of tax-deferred earnings, and you’ll be building a retirement nest egg.
2) Roth IRAs
- Based on your Modified Adjusted Gross Income (MAGI), you can make a full or partial contribution to a Roth IRA. For 2013:
- If you are a single filer – you can make a full contribution if your MAGI is below $112,000 and a partial contribution if your MAGI is $112,000 to $127,000
- If you are married, filing jointly – you can make a full contribution if your MAGI is below $178,000 and a partial contribution if your MAGI is $178,000 to $188,000
- You pay taxes up front on your contributions, but you’ll pay no tax when you withdraw the contribution money.
- The money earned on your contributions grows tax-deferred and can be withdrawn free from federal income tax if:
- Your initial contribution to the Roth is held at least five years and
- You are at least age 59 ½ or
- You die, become disabled, or purchase a first home ($10,000 lifetime limit)
- There are no required minimum distributions.
- You can withdraw the contributions at any time, and no taxes are due because you already paid the tax.
- A 10 percent penalty will be imposed if the withdrawal of earnings does not meet the after-five-years criteria and the 59 ½ age requirement.
A Roth IRA might be a good choice if…
- You don’t need an immediate tax deduction.
- You think you’ll be in a higher tax bracket when you retire.
If you qualify for both a Roth IRA and a tax-deductible Traditional IRA, consider the Roth IRA if you don’t need the tax deduction.
- You won’t have to take required minimum distributions when you reach age 70 ½. That makes a Roth IRA a useful estate planning tool – especially since the distributions are federal income tax-free.
- You’ll be able to withdraw your contributions at any time without penalty or taxes.
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COUNTRY Financial® and our representatives cannot give tax advice. Any information we provide reflects our understanding of current tax laws, which are subject to change and reinterpretation. See your tax advisor regarding your personal circumstances.