Retirement: Have you considered an IRA?

Putting money into an IRA helps you save for retirement and get tax breaks at the same time.

While there are several types of Individual Retirement Accounts, you’ll most commonly hear about ‘Roth’ and  ‘traditional’ IRAs.

IRAs are accounts that you can open on your own at banks, brokerage firms or mutual fund companies, and your investment options will include mutual funds, stocks, bonds and more.  Be sure to talk with a financial advisor and do your research on suggested investment mixes that coincide with your age, risk tolerance and long-term plans.

A primary difference between traditional and Roth IRAs is when you pay taxes on them.

With a traditional IRA, you might be able to deduct all the money you put into the account from your yearly taxes, and you won’t have to pay income tax on it or your investment earnings until you start withdrawing funds after age 59½. At that time, you’ll pay a tax rate based on your annual income. Although there are a few exceptions, if you withdraw the money before 59½ you will pay ordinary income tax on it plus an additional 10% penalty on the amount withdrawn.

With a Roth IRA, you pay income tax on the money before adding it to your account, but when you start withdrawing the money after 59½, you won’t have to pay income tax on either your contributions or any of your investment earnings. However, if you need to take out money in advance, you face a 10% penalty on your earnings income, but not the money you contributed.

For traditional and Roth accounts, the annual contribution limits per person are up to $5,500 if you are under age 50 and $6,500 if you are 50 or older. Depending on your household income, you might not be able to contribute the full amount to a Roth, and your total tax deductions for traditional IRA contributions could be limited by whether or not you have a retirement plan through your job or by how much you earn.

Here is a general overview of IRA types:

Traditional IRA

  • Anyone under age 70½ with a taxable income can contribute to this type of IRA.
  • Depending on your annual income and whether or not you participate in a retirement program at work, you might be able to deduct your IRA contributions from your annual income tax.
  • You can contribute up to $6,000 each year if you are under age 50 and $7,000 if you are 50 or older.
  • You will have to pay regular income tax on withdrawals made after age 59½, but if you make withdrawals prior to that you will have to pay income tax plus a 10% penalty on the full amount withdrawn.
  • Qualified withdrawals can be made at anytime after 59½, but you’ll need to start making ‘qualified you minimum withdrawals’ the year turn 70½.
  • You can’t contribute to a traditional IRA after 70½.

Roth IRA

  • Whether or not you can contribute the fully allowed amount to a Roth IRA is limited by your annual income. High earners might not be able to contribute at all.
  • Money added to a Roth IRA is taxed up front, but that means you’ll pay no income taxes on it or any of your earnings when you make qualified withdrawals after age 59½.
  • Your maximum annual contribution is $6,000 if you are under age 50 and $7,000 if you are 50 or older.
  • You can withdraw your contributed money at any age and face no penalty, but if you withdraw earnings money prior to 59½, that amount will be penalized 10%.
  • While you have to start withdrawing money from a traditional IRA at age 70½, there are no mandatory requirements for Roth accounts and you can continue making contributions to a Roth for as long as you live.

Be sure to consult a financial professional or to check the IRS website for detailed and specific guidelines and limits for each type of IRA.

(You can learn more about IRAs on the web, including sites like this one at the Internal Revenue Service.)