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An individual retirement account, otherwise called IRA, is an investment that can provide you with tax-deferred benefits as you save for your retirement.
At your local bank, or through a broker, you can open up an IRA.
There are several to choose from, and depending upon the IRA that you would prefer having your tax-deductible contributions, as well as your withdrawals, can be very different.
How An IRA Works
There are both after-tax dollars, and pretax dollars, to consider when you are contributing to your IRA account. The money you are investing can be placed into EFTs, stocks, bonds, and many other types of assets.
As your IRA grows over time, you can monitor its growth, which will depend on how much you contribute. There are so many IRAs to choose from, including spousal, Roth IRAs, Simple IRAs, and traditional IRAs as well.
Both you and your spouse must contribute to an IRA through your earned income, and there are limits to how much you can contribute.
There are also rules regarding the withdrawal of this money: for example, you can lose up to 10% of your money by withdrawing your money before the age of 59 1/2 unless there is a justifiable exception.
IRAs are beneficial because your money can grow, as well as compound, on a tax-deferred or tax-free basis, yet there are also other benefits.
You can easily lower your tax bill, depending upon the strategy you are choosing to use when contributing to an IRA. There are many other benefits including investing in certain investments that are not available to people outside of your workplace.
The fourth benefit is that you can use your 401(k) or pension to survive after you retire, yet an IRA will give you even more money.
Different Types Of IRAs
The following five IRAs are very popular:
Traditional IRAs
When you contribute to a traditional IRA, these are usually tax deductible. If you are contributing up to $3000 to this IRA, you will not be taxed at the end of the year on this money. In 2022, you can only contribute $6000 per year.
In 2023, this will increase by five dollars. If you are older than 50, you can also contribute an additional thousand dollars to this account.
If you and your spouse have a retirement plan at work, the amount that you can deduct is reduced and will be eliminated, once you arrive at a certain income threshold.
Making contributions will still be possible, but you will not be able to regard this money as tax deductible.
Additionally, if both you and your spouse do not currently have a retirement plan, you can deduct your IRA contributions regardless of how much you make.
Roth IRA
If you are contributing to a Roth IRA, these are not tax-deductible, but if you withdraw money from this account, it will be tax-free, nor will you be charged investment gains. This is the best option for investors who have years or decades before they retire.
One question that you need to ask yourself is if you would rather pay your taxes now or later. Most people will pay their taxes now.
When you have a Roth IRA, can assist you in fighting against inflation, primarily because money tends to be less valuable over time.
One way of thinking about a Roth IRA is that you can either pay taxes on the money that you are paying into it, or you can pay taxes at a proverbial harvesting of that account.
There is no set rule as to what you should do, nor does anyone really what will happen in the future, but if you do experience higher taxes in the future, and you take that money out at a future point in time, you are minimizing how much you are paying in taxes.
No limit for Roth IRA contributions is $6000 in 2022, and $7000 if you are 50 years of age or older for those that make less than $144,000 a year, file their taxes using a single category or head of the household category, and can be as high as $214,000 when filing jointly as a married couple.
In 2023, these contribution limits will go up by $1000 for both people under and over the age of 50 based upon modified adjusted gross income amounts of $153,000 annual income for individuals, or $228,000 for people filing jointly as a married couple.
It should also be noted that there are no limits on how much you can earn with your Roth IRA so the amount that you decide to contribute phases out based on how much you are earning.
If you are making too much money to contribute to your Roth IRA, there is a backdoor method that you can use.
Additionally, your contribution for both traditional IRAs and Roth IRAs will be combined; if you have both of us, you can only contribute the maximum amount between them.
SEP IRAs
In general, SEP IRAs are designed for people that are business owners, or self-employed individuals, that have very few or no employees at all. Just like a traditional IRA, the money you are contributing will be tax-deductible.
This will allow your investment to grow tax-deferred until you reach retirement age. In 2022, you are limited to 25% of compensation which comes out to $60,000 a year, or whichever is less. For 2023, this will go up to $66,000.
There is no way to contribute in the form of a catch-up contribution if you are beyond the age of 50 for SEP IRAs, plus you must begin to receive your money before the age of 72.
These IRAs also require proportional contributions if there is a business owner involved that is also contributing.
SIMPLE IRA
SIMPLE IRAs are designed specifically for small businesses that do not have more than 100 employees. These are also similar to traditional IRAs because of the tax-deductible contribution rules.
As your investment begins to grow, which will be tax-deferred, your distributions must be taxed as income. For these IRAs, each employee has contribution limits which for 2022 is $14,000 a year if you are under 50.
It is $15,500 per year in 2023. Individuals 50 and older can add additional money, a $3000 catch-up contribution, in 2022 and will subsequently be able to contribute $3500 in 2023. Employer contributions must be provided.
Rollover IRAs
As the name would suggest, this is an IRA that you roll over, transferring your eligible assets from what is usually an employer-sponsored program like a 401(k) directly into an IRA.
Traditional IRA Deduction Limits
So how much can you deduct from your taxes when contributing to a traditional IRA? The following limits are only applicable to you and your spouse if you currently have a retirement program at your place of employment.
In general, taking distributions from your traditional IRA may begin at 59 1/2. If you decide to take your money out before that age, a 10% penalty could be applicable. If you reach the age of 72, you need to take distributions from your account.
I started BMOGAM Viewpoints as a way to compile all my views on investing in one place. I own my home, have some real estate, and own a few stocks like most people, but what really drives my interest in investing is I have a strong love of precious metals, especially gold.
