An individual retirement account is one of the most common ways to save for your golden years. The term includes traditional and Roth IRAs, funded with pre-tax dollars but have different tax implications when you withdraw money from them in retirement. With a standard IRA, earnings on contributions aren’t taxed until withdrawal. With a Roth IRA, you contribute money that has already been taxed, and earnings grow tax-free.
The main difference between the two accounts is how they’re taxed when you withdraw funds in retirement: With a standard IRA, earnings on contributions are taxed. With a Roth IRA, you contribute money that has already been taxed, and earnings grow tax-free. Visit www.raremetalblog.com/important-things-you-need-to-know-about-your-ira-account/ to know more about the different IRA options.
People who expect to be in the same or higher income bracket during retirement are better off with standard IRAs because they’re forced to withdraw lower amounts of taxable funds early on when their tax rate is highest. However, those who expect to be in a lower income bracket during retirement should consider Roth IRAs, requiring them to withdraw more significant tax-free funds than standard IRA accounts.
How to open an account?
Once you determine which type of IRA is right for your situation, it’s time to open an account. To do so, visit a brokerage firm or financial institution that offers IRAs and fill out the paperwork required to establish one. If you’re self-employed, you can also set up an IRA through a qualified custodian who will act as the trustee of your IRA.
The initial investment minimum for both standard and Roth IRAs is $250. Still, many financial institutions have lower or no minimums if you sign up for electronic delivery of statements, confirmations, prospectuses, and other information. Other types of IRA accounts include SIMPLE (Savings Incentive Match Plan for Employees), SEP (Simplified Employee Pension), and traditional 401(k)—most of which are self-directed IRAs.
How much can you contribute?
The maximum annual contribution for both Roth and standard accounts in 2018 is $5500, with an additional catch-up contribution of $1000 if you’re age 50 or older. That’s up to $500 from 2017.
If you’re not retired, but your income falls below a certain level—which changes annually and is based on tax returns filed two years before withdrawal—you may be able to avoid RMDs by establishing a Roth IRA.
In conclusion, the important thing is to know your options and any potential tax implications before deciding.