What is an IRA?
Comment February 25, 2015 by Triangle Credit Union
An Individual Retirement Account (IRA) is a retirement vehicle that offers tax advantages. Two of the most common types of IRAs are Traditional and Roth IRAs. In this post, I’ll describe both and discuss the potential tax benefits.
A Traditional Individual Retirement Account generally allows you to defer taxes until you withdraw, typically at retirement. According to the Internal Revenue Service (IRS), “contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.” In 2015 (and 2014), the maximum annual contribution to a Traditional IRA is $5,500. You have up until the tax-filing deadline, April 15th, to make a contribution for the previous tax year. Withdrawals from a Traditional IRA, prior to 59 ½ are generally assessed a 10% tax penalty though there are exceptions. Once you reach 59 ½, you can begin withdrawing from your Traditional IRA without the penalty. By age 70 ½, you must begin withdrawing from your Traditional IRA or be subject to additional taxes. This is called the required minimum distribution (RMD). The amount that you must withdraw is determined by the IRS based on your age and account balance, unless you have a spousal beneficiary who is more than 10 years younger. In such a case, the IRS bases the required minimum distribution on the joint life expectancy of you, the plan participant, and your spousal beneficiary.
Unlike a Traditional IRA contributions to a Roth IRA are not tax deductible. The main benefit of a Roth IRA is that come retirement, your qualified distributions are not taxable. As with a Traditional IRA, the maximum annual contribution to a Roth IRA for 2015 (and 2014) is $5,500. You have up until the tax-filing deadline, April 15th, to make a contribution for the previous tax year. Withdrawals from a Roth IRA, prior to 59 ½ are generally assessed a 10% tax penalty though there are exceptions. Once you reach 59 ½, you can begin withdrawing from your Roth IRA without the penalty. Unlike a Traditional IRA, you don’t have to withdraw a required minimum distribution from your Roth IRA once you reach 70 ½ as long as you are the original owner.
As with any long-term savings plan, always consult with your financial advisor before making any significant commitments. For your benefit, we offer educational seminars throughout the year on retirement topics. Visit our Events page for a list of upcoming topics and to register for the next seminar. Additionally, visit our TMSG, LLC page, to learn more about how Triangle Member Services Group, LLC can help you prepare for retirement.