There are many ways people plan for retirement. Individual Retirement Arrangements, or IRAs, are a common one. IRAs provide tax incentives for people to make investments that can provide financial security when they retire. These accounts can be with a bank or other financial institution, a life insurance company, mutual fund, or stockbroker.
Here are some things to know about a traditional IRA.
A traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible.
- Generally, the money in a traditional IRA isn’t taxed until it’s withdrawn.
- There are annual limits to contributions depending on the person’s age and the type of IRA.
- When planning when to withdraw money from an IRA, taxpayers should know that:
- They may face a 10% penalty and a tax bill if they withdraw money before age 59½, unless they qualify for an exception.
- Usually, they must start taking withdrawals from their IRA when they reach age 72. For tax years 2019 and earlier, that age was 70½.
- Special distribution rules apply for IRA beneficiaries.
Roth IRAs are like traditional IRAs, but there are some important differences.
A Roth IRA is another tax-advantaged personal savings plan with many of the same rules as a traditional IRA but there are exceptions:
- A taxpayer can’t deduct contributions to a Roth IRA.
- Qualified distributions are tax-free.
- Roth IRAs don’t require withdrawals until after the death of the owner.
Here are a few other types of IRAs:
- Savings Incentive Match Plan for Employees. A SIMPLE IRA allows employees and employers to contribute to traditional IRAs set up for employees. It is suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.
- Simplified Employee Pension. A SEP IRA is set up by an employer. The employer makes contributions directly to an IRA set up for each employee.
- Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days