IRAs
An Individual Retirement Account, known as an IRA, is a personal savings plan that allows you to set aside a certain amount of money each year for retirement while you benefit from a tax break.
There are two general types of IRAs:
- Traditional IRA – This is a tax-deferred retirement savings account, which means you'll pay income tax later on the money you withdraw in retirement. You'd pay a 10 percent tax on money withdrawn before age 59½. After you turn 70½, you cannot continue contributing whether you are retired or not, and you'll have to begin making withdrawals, known as required minimum distributions, from the IRA account.
- Contributions are tax-deductible, subject to certain limitations.1
- Taxes are deferred on earnings until you begin withdrawing funds.
- Withdrawals are taxable.
- Maximum Contributions for 2020: Up to $6,000 for those under 50; $7,000 for those 50 and up.
- Anyone with earned income may contribute up to age 70-1/2.
- All earnings and deductible contributions are taxable upon withdrawal.
- Penalties will be assessed if withdrawals are taken before age 59-1/2, or if withdrawals are not taken by age 70-1/2.
- Required minimum distributions upon reaching age 70-1/2.
- Roth IRA – A retirement savings account of after-tax dollars, which means you've already paid taxes on the money you put in. You can withdraw your contributions at any time for any reason tax-free and can continue contributing to your Roth IRA regardless of your age. You pay no taxes when you withdraw after retirement.
- Maximum Contributions for 2020: Up to $6,000 for those under 50; $7,000 for those 50 and up.
- No age restrictions.
- If you are single, you may have a modified Adjusted Gross Income (AGI) of up to $124,000 in 2020 to make a full contribution.1
- If you are married filing jointly, you may have a modified AGI of up to $196,000 in 2020 to make a full contribution.1
- Not everyone is eligible for opening a Roth IRA, and traditional and Roth IRAs both have set annual contribution limits.
- Contributions can be withdrawn anytime without taxes or penalties.
- Earnings can be withdrawn, without taxes or penalties, if you are 59-1/2 and your account has been open five years or more
- There are no distribution requirements.
Simplified Employee Pension IRA
A Simplified Employee Pension IRA (SEP IRA) is a type of traditional IRA for self-employed individuals or small business owners. Any business owner with one or more employees, as well as anyone with freelance income, can open a SEP IRA. Contributions, which are tax-deductible for the business or individual, go into a traditional IRA held in the employee's name. Employees of the business cannot contribute — the employer does.
Savings Incentive Match Plan for Employees
A Savings Incentive Match Plan for Employees (SIMPLE IRA) is another type of traditional IRA for small businesses and self-employed individuals. Employees can contribute to their SIMPLE IRA and the employer is required to make a contribution on the employee's behalf — either a dollar-for-dollar match of up to 3 percent of salary or a flat 2 percent of pay — regardless of whether the employee contributes to the account.
¹Not intended as tax advice. Please consult a tax professional. The above descriptions are meant to be educational in nature. Certain restrictions apply to every type of IRAs to take full advantage of their favorable tax treatment. It's important to understand the requirements and limitations on the various IRAs. Rio Grande CU Membership is required for all accounts.