Invest in Your Future: Benefits of an IRA

How does an IRA work?

Individuals and married couples with earned income can contribute to an IRA. Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed. Contributions may be tax deductible depending on your circumstances. Certain income limits and employer sponsored retirement plans, such as a 401k, may reduce or eliminate your deduction. Individuals with income less than $87,000 and married couples less than $143,000 may contribute to a tax deductible IRA. Withdrawals after age 59 1/2 are generally taxed at your ordinary income rate, with mandatory withdrawals beginning at age 73. Withdrawals made before age 59 1/2 may be subject to a 10% penalty in addition to taxes. Contributions for the previous year can be made until the tax filling deadline of the following year.

How much can I contribute?

Maximum contributions to both a Roth IRA and Traditional IRA are $7,000 per person and $14,000 per married couple. Contributions increase for those over age 50, allowing an additional $1,000 per person. Contribution limits may increase in subsequent years, as determined by the IRS.

Benefits of a Roth IRA

A Roth IRA is similar to a Traditional IRA with some important distinctions. The first of which is Roth IRA contributions are not tax deductible, however, depending on your income you may receive a tax credit. Individuals with income less than $161,000 and couples less than $240,000 are eligible for a Roth IRA. Contributions made to a Roth use after tax dollars, allowing for tax free growth and tax free withdrawals after age 59 1/2. Early withdrawals of your principle investment are not subject to taxation or a 10% penalty. Earnings withdrawn before age 59 1/2 may be subject to ordinary income taxes and a 10% penalty. Another advantage of a Roth IRA is owners are not required to take minimum distributions after age 73, allowing for continued growth if the account is not needed for income.