Good evening and Happy Monday to you all ,
I’m going to call myself “The Night Writer” since my posts come at night 🙂
Since we are wrapping up tax season, I thought it would be a great idea to discuss Individual Retirement Accounts, also known as IRAs. If you remember from last week’s post, I mentioned there are two types of IRAs. We have the Traditional IRA and the Roth IRA.
Let’s take a look at some of the features to understand how they work.
The Traditional IRA is a tax deferred, qualified, retirement plan, that receives special tax privileges, as governed by the IRS. The money contributed must come from earned income. In other words, you must be working and under the age of 70 1/2 to contribute. This type of IRA continues to grow tax deferred and earns compounded interest (money accumulation) until distributions (withdrawals) begin. With Traditional IRAs, all money is taxed whenever a distribution happens. If you withdraw money from your IRA PRIOR to age 59 1/2, you will not only pay regular taxes on this money, but you will pay a 10% penalty on the early withdrawal, unless a specific, qualifying event of a maximum withdrawal of 10,000, excludes you from paying the penalty. Some examples are 1st time home buyers, medical bills that will not be reimbursed, are just a few). The IRS states that this type of IRA can be can be written off on your taxes because you use before tax dollars to contribute. Basically, this money comes off of your gross pay, not your net (take home) pay. One thing to remember is if you make a certain salary, you may only be eligible to do a partial deduction or none at all from your taxes. Growing tax deferred is nice but once you hit 70 1/2, you must start to take your RMDs or the IRS will penalize you. The IRS feels if they were nice enough to let you grow tax deferred (paying no taxes) until distribution, then they will mandate when you should start paying something on your accumulation.
Ask yourself: When do I want to pay taxes? Now or later?
Although the Roth is an IRA as well, and has some similarities to the Traditional IRA, this type of retirement plan is definitely different.
Both IRAs require the person to be at least 59 1/2 before they can withdraw without the 10% penalty.
You pay no taxes on either plan as they sit and grow in their respective accounts.
Withdrawals of a maximum of $10000 will not incur an IRS penalty for a qualifying event.
The Roth is a non-qualified, after tax dollars contribution, which means the Roth does not provide any tax deduction privileges from the IRS like the Traditional IRA. With the Roth since it goes in after taxes, you can withdraw it tax-free when you are ready (providing you are the required age of 59 1/2). One exception is if the person wants to withdraw their contributions only, not earnings, PRIOR to age 59 1/2, they can do so. This type of IRA has to be held a minimum of 5 years AFTER the first contribution. Once this threshold is met, the only thing that must be attained is the age. You are now penalty and tax-free! At 70 1/2, you are NOT required to do RMDs. The owner can take the money out whenever they wish because it is after tax contributions.
Ask yourself again: When do I want to pay taxes? Now or later?
So, you will remember last week we spoke about the differences between Qualified and Non-Qualified monies, and the various restrictions for each type. As promised, I have a $10 Starbucks gift card to give away for the first person to answer this question:
Q: How does qualified money grow?
Next week’s topic: Life Insurance – What are the benefits?
Changing the lives in our community….One life at a time .