Individual Retirement Accounts: What You Should Know
Most people planning for retirement will consider contributing to at least one IRA: a retirement tool that can help you build tax-sheltered (sometimes tax-free) wealth during your working years.
Cash from your IRA can be used for investments in stocks and bonds, property, mutual funds, and some other assets. When planning your contributions, though, it is important to know about the limits and specific tax rules – as well as advantages – of each type of IRA. Here are the 4 most common:
· The Traditional IRA: The money you contribute to a Traditional IRA is included in your tax deductions each year. All dividends, interest income, and capital gains this money earns are tax-sheltered until withdrawn. When you take distributions from this type of account, that money becomes taxable income. The contribution limit for 2013 is $5,500 for a traditional IRA, but if you are 50+ years old, you are allowed to make additional “catch-up” contributions. You have to wait to begin taking distributions until you are over 59 ½ years old (or pay penalties), and begin by age 70.
· The Roth IRA: Roth IRA contributions cannot be deducted from your taxes in the year of the contribution, but money in the account grows tax-free – and when withdrawn (which you may begin at 59 ½ years without penalty), it is also not taxable. All the wealth you accumulate in the account through investments, et cetera – even large amounts – will never be taxed. Deposit limits are the same as those for a Traditional IRA, but there are income limits that change yearly.
· The SEP (Simplified Employee Pension) IRA: Often used by self-employed persons or small business owners with very few employees, this is similar to a Traditional IRA, but may have significantly higher limits for annual contributions – up to $100,000 for a married couple in just one year. No early withdrawals are allowed.
· The Simple IRA: The choice of many small business owners, this IRA has a more complex set of rules and a higher contribution limit than Traditional and Roth accounts.
If you have more than one IRA, there are consolidated (overall) contribution limits. It is wise to talk to a financial adviser about all of the rules and complexities of these retirement accounts, so that you can make the most of your retirement contributions. Also, check out IRS Publication 590 for more details.