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  • IRA



What Is an IRA? An individual retirement account (IRA) is an account available to people with earned income (and, in some cases, their non-working spouses) to set aside a portion of earnings for retirement. The tax treatment of the account differs between a traditional IRA and a Roth IRA. With a traditional IRA, contributions are tax deductible, and tax is deferred on contributions and earnings until the money is withdrawn (typically at retirement). With a Roth IRA, contributions are not tax deductible, but distributions are not taxed when withdrawn. Earnings on Roth contributions may also be withdrawn tax free under certain circumstances.

How Do IRAs Work? The wage earner opens a trust or custodial account with a bank, a credit union, a savings and loan, or a brokerage firm. Another option is to purchase an individual retirement annuity contract. In 2017, participants in traditional and Roth IRAs are subject to annual contribution limits of $5,500 for those age 49 and under, and $6,500 for individuals age 50 and over. The IRS limits contributions to 100% of earned income, if less than the dollar maximums. The IRS also limits contributions for non working spouses.

Are There Other Limitations? Under a Roth IRA, the contribution amount may be limited or phased out depending on AGI and marital status. Under a traditional IRA, participation in an employer-sponsored retirement plan, such as a pension or 401(k) plan, may limit or phase out the deduction, depending on AGI and marital status.

How Are IRA Distributions Taxed? Distributions from a traditional IRA are taxed as ordinary income to the extent they are attributable to tax-deferred contributions and earnings. Distributions from a Roth IRA are not taxed as long as certain requirements are met, since contributions were made with after-tax dollars. Distributions before age 59½ are subject to a 10% penalty tax unless certain exceptions apply. Traditional IRA owners can only contribute until the year they turn 70½ and must begin taking minimum distributions at age 70½. There are no requirements for Roth IRA owners, who may continue contributions after age 70½ even when they are still working.

The Benefits: A Summary

  • Retirement benefits for workers and spouses
  • Tax-deductible contributions to traditional IRAs, subject to limits and restrictions
  • Tax-deferred growth for both types of IRAs
  • Tax-free withdrawals from a Roth IRA (unless it is a conversion of a traditional IRA, in which case the 10% premature distribution tax may apply)
  • No required minimum distributions from a Roth IRA during the owner’s lifetime

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