A Brief Overview Of IRA’s

A Brief Overview of IRA's

When thinking about retirement, most save through an employer (like a 401k). The second option is through a personal Individual Retirement Account (IRA). To contribute to an IRA, you need earned income (like wages or compensation)!

* Do not rely solely on this for advice/an evaluation of one’s personal situation should be considered
** Rules may have changed
IRA Overview

Here are the most popular:

Traditional IRA:

  • Contributions are tax-deductible if under the IRS limits (see below).
  • Earnings are not taxed until you take your required minimum distribution (RMD).
  • You must begin taking your RMD at age 72.5 but can begin at age 59.5.

Roth IRA:

  • Contributions to your Roth are after-tax (subject to limits below).
  • Tax-free withdrawals in retirement.
  • You can make contributions to your Roth IRA after you reach age 72 ½ (you can’t do this with a Traditional IRA).
  • You can leave amounts in your Roth IRA as long as you live/No RMD required ever.
 **You can withdraw contributions tax-free from a Roth IRA if open for 5 years.

Spousal IRA:

  • If one spouse doesn’t work, but the other works (limits apply), there is an ability to put money into both Individuals IRAs.
  • Couples must file joint returns to contribute to a spousal IRA.
  • The nonworking spouse must be under age 72 in the year of the contribution for a traditional IRA. There are no age restrictions on a Roth IRA for a nonworking spouse.

Backdoor Roth:

  • A backdoor Roth IRA is when you contribute after-tax money to a traditional IRA but then convert it to a Roth IRA. This is due to income restrictions.

Annual Limits / Income Restrictions:

  • Limits are based on your modified adjusted gross income(MAGI) and tax-filing status. MAGI is your adjusted gross income (AGI) from your tax return than adding back deductions.
  • For 2021, annual limits are $6,000 or $7,000 if you are over 50 years of age, as long as there is enough earned income to match the contribution.

Exceptions to the Penalties on Early IRA Withdrawals (Some but not all exceptions)

Qualified Higher Education Expenses

This applies to education expenses for you and people in your family, such as your children, spouse, and even your grandchildren. Limits apply. Tuition and supplies are included while room and board may apply.

Buying Your First Home

You can withdraw up to $10,000 from your traditional IRA to put toward the purchase of your first home. The IRS defines this as someone who hasn’t owned a principal residence in the last two years. Your spouse can also do this, giving you double the funds!

Death or Complete Permanent Disability

You must not be able to earn income to apply

Qualified Reservist Distributions (Military Exceptions)

Military members called to active duty for longer than 179 days get a penalty-free withdrawal.

Medical Expenses and Health Insurance Premiums

You can take money out early for certain medical costs and situations. You can withdraw money to pay for:

  • Unreimbursed medical expenses that are more than 10% (7.5% if you are age 60 or older) of your adjusted gross income (AGI)
  • Health insurance premiums for you, your spouse and children while you are unemployed

Parenting

In the year you become a parent — through birth or adoption — you can withdraw up to $5,000 from your IRA (thanks to the new Secure Act, which went into effect in 2020)

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