Individual Retirement Account (IRA)
What is an IRA?
An Individual Retirement Account (IRA) is a type of savings account that is designed to help you save for retirement and offers many tax advantages. There are two different types of IRAs: Traditional and Roth IRAs.
The primary difference between a Traditional IRA and Roth IRA is the type of tax benefit each offers. With a Roth IRA, you get no deduction for contributions, but if you follow all the rules your investment earnings will be distributed tax- and penalty-free in retirement. Traditional IRAs can provide a deduction for contributions and you defer taxes on investment earnings until funds are withdrawn, typically in retirement. For more information about the two types of IRAs, including details about eligibility, visit the Traditional vs. Roth section of our IRA Center.
The first step in opening an IRA is to select the option that fits your individual investment style. It’s important to know that application instructions vary based on the type of investing style you choose. For additional details on bank or brokerage options, you can also call us at 1-877-493-4727.
What is my Modified Adjusted Gross Income (MAGI)?
Your Modified Adjusted Gross Income (MAGI) is an income tax term. It is your adjusted gross income (AGI) with certain deductions and exclusions added back. It’s used to determine whether or not you’re allowed certain tax benefits like being able to deduct your Traditional IRA contribution or qualify to make a Roth IRA contribution. Need more information? Review IRS information on IRAs, IRS Publication 590-A, or contact your tax advisor.
Once I open my IRA, how should I invest the funds within my account?
You can choose from a full range of investments, including stocks, bonds, CDs and savings, Exchange-Traded Funds (ETFs), and mutual funds.
Whether you prefer to make your investment decisions independently, receive investment guidance, or leave all the decision-making to a team of professionals, we have a an option.
What is an ‘Individual Retirement Account – IRA
An individual retirement account is an investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs as of 2016: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs. Sometimes referred to as individual retirement arrangements, IRAs can consist of a range of financial products such as stocks, bonds or mutual funds.
BREAKING DOWN ‘Individual Retirement Account – IRA’
Traditional and Roth IRAs are established by individual taxpayers, while SEP and SIMPLE IRAs are retirement plans established by small business owners and self-employed individuals.
In most cases, contributions to traditional IRAs are tax deductible. For example, if someone contributes $5,000 to his IRA, he can claim that amount as a deduction on his income tax return, and the Internal Revenue Service does not apply income tax to those earnings. However, when the individual withdraws from the account during retirement, his withdrawals are taxed as income. As of 2016, annul individual contributions to traditional IRAs cannot exceed more than $5,000.
However, not everyone qualifies for a deductible account. If you have a retirement plan available through work and you earn less than $61,000 for an individual as of 2016, your IRA contributions are deductible, but if you earn over that amount, only a portion of your contributions may be deductible. If your adjusted gross income is more than $71,000, your IRA contributions are not deductible, unless you do not have a retirement plan available through your employer. The IRS has additional rules for people who use another filing status, such as married filing jointly or head of household.
Roth IRA contributions are not tax-deductible. However, eligible distributions are tax-free. This means, you contribute to a Roth IRA with after-tax dollars, but as the account grows, you do not face any taxes on capital gains, and when you retire, you can withdraw from the account without incurring any income taxes on your withdrawals.
Simplified Employee Pension IRAs
Self-employed individuals, such as independent contractors, freelancers and small business owners, can set up SEP IRAs. If a business owner sets up a SEP IRA for his employees, he can deduct the contributions from his reported business income and potentially secure a lower tax rate on his business income. However, his employees are not allowed to contribute to their accounts, and when they make withdraws from their accounts during retirement, the withdrawals are taxed as income.
SIMPLE IRAs or Savings Inventive Match Plans for Employees are also for small businesses and self-employed individuals. However, unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions to their accounts, and the employer is required to make contributions. All the contributions are tax deductible, potentially pushing the business or employee into a lower tax bracket, a helpful way to reduce one’s tax bill.
To learn more about saving for retirement, check out What’s the difference between an individual retirement account (IRA) and a certificate of deposit (CD)?
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