Saving for retirement should be an essential part of everyone’s financial plan. One of the best ways to do that is to open an IRA. If you’re unsure if an IRA is right for you or if you don’t even know what an IRA is, here are 10 things to know about IRAs to help you understand what they are and how they work.
- “IRA” is an acronym for Individual Retirement Arrangement.
- To contribute to an IRA, you must have taxable income. This can be from salaries, wages, tips, bonuses, commissions, and alimony.
- For Traditional IRAs, you must be under 70 ½ years old at the end of the tax year to contribute. There is no age limit for Roth IRAs.
- 2014 IRA contributions can be made until the end of the 2014 tax season, not including extensions. Generally, this means you can make a 2014 contribution until April 15, 2015. In any year, be sure to clarify to your plan sponsor which year you want a contribution to be applied to when you make a contribution between January 1 and April 15.
- How you contribute to an IRA is up to you. For example, you can make regular small contributions or one large contribution. However, the most you can contribute to your IRA in 2014 is your taxable income for the year or the IRA contribution limit of $5,500, whichever amount is smaller. The IRA contribution limit is $6,500 if you will be 50 or older at the end of 2014. These limits may change from year to year.
- You can receive distributions from a Traditional IRA without penalty once you are 59 ½. You are required to receive a minimum distribution from your IRA the year you turn 70 ½; this is called a required minimum distribution, or RMD.
- Similarly, you can take withdrawals from a Roth IRA with no penalty once you are 59 ½, but only if the account is at least five years old. There are no RMDs with a Roth IRA.
- Contributions to a Traditional IRA are not taxed but distributions from it are.*
- On the other hand, contributions to a Roth IRA are taxed, but distributions are tax-free.*
- Contributions to a Traditional IRA may be tax deductible. However, you can’t deduct contributions to a Roth IRA.*
While some people might be able to afford retirement simply through Social Security and their employer’s retirement plan, most people will need additional money to live comfortably during retirement. An IRA can provide a stable, third source of income that can help you reach your retirement goals. To learn more about IRAs, feel free to leave a comment below or send us a private message.
*For a better understanding on the tax rules and tax implications, consult a tax advisor.
Covenant Trust Company is a financial services company owned by the Evangelical Covenant Church and its affiliates. Our services are available to anyone in need of asset management, retirement planning, legacy planning, gift planning, or trust services. In addition, we seek opportunities to encourage and promote healthy financial habits, and keep a personal finance blog at www.covtrustblog.com.