Why are IRAs valuable?
- You can transfer money to and from employer retirement plans on a tax-free basis
- You, not your employer, is listed and protected as the owner
- You can choose from a wide variety of products and custodians
- You get to defer taxes on your growth
- Not understanding when you must begin taking your required minimum distributions
- Not knowing how to figure your required minimum distribution
- Taking your required minimum distribution from the wrong account
- Getting caught in the 20% tax trap
- Not structuring your IRA to allow beneficiaries to “stretch” your IRA
- Not taking advantage of the special lump-sum distribution rules
- Not understanding how a surviving spouse can accept the decedent’s IRA
- Not fully understanding Roth IRAs
- Not using the little-known income in respect of a decedent tax break
A traditional IRA is tax-deferred. Contributions to this type of plan can be tax-deductible depending on the taxpayer’s income and tax filing status. These contributions are made on a pre-tax basis so the money is invested into the plan before it has been taxed. This is beneficial because it can lower your current tax bracket allowing your money to grow tax-free until you decide to withdraw it. Everyone is eligible to contribute to a Traditional IRA, but not everyone will have the benefit of receiving tax deductions.
A Roth IRA is tax-exempt. Contributions into this plan are not tax-deductible when made, but distributions made through retirement years are income tax-free. The benefit to this type of IRA is that you do not pay income tax when you withdraw your money. In order to contribute to a Roth IRA there are income limits. For a person filing single, they cannot earn over $105,000 and married couples have a maximum income level of $177,000. Another benefit to this type of plan is that there is no minimum distribution for Roth IRA accounts.
