Learning Center

IRA's (P1)

IRA basics
  • Traditional IRAs
  • What is a Roth IRA?
  • SEP (Simplified Employee Pension) IRAs
  • SIMPLE (Savings Incentive Match Plan for Employees) IRAs
  • What is the “Stretch IRA” concept?

  • Traditional IRAs:
    Both deductible and non-deductible contributions (up to a combined maximum of $5,000) can be made to traditional IRAs. The contributions are provided by the individual and cannot be continued once he or she has reached age 70 ½. Once the funds are contributed into an IRA account they grow on a tax-deferred basis, meaning that no taxes are paid on these funds until they are withdrawn. When the owner reaches age 70 ½, he or she must begin taking required minimum distributions. If, however, no distribution is taken or if the distribution is not large enough (as determined by using an age-based IRS distribution table), the IRS imposes a tax penalty equal to 50% of the amount by which the required minimum distribution amount exceeds the actual amount distributed. As with other IRAs, distributions received prior to age 59 ½ are generally subject to a 10% tax penalty (excise tax) imposed by the IRS for premature withdrawals. Other qualified plans and deferred annuities can be rolled into a traditional IRA (see IRS.gov for additional information).

    What is a Roth IRA?
    Named for Senator Roth of Delaware, a Roth IRA is a retirement plan comparable to a 401(k), 403(b) or traditional IRA, but with some fundamental differences. With 401(k)s, 403(b)s and other qualified plans, an individual receives a tax deduction every year that he or she makes a contribution to his or her plan. This immediate tax savings is attractive, but both the contributions and the earnings of these plans will be taxed upon distribution.

    With the Roth IRA, however, the contributions are made with dollars after they have been taxed. But once these dollars are in a Roth IRA, they grow tax free. And then later, all distributions (from both contributions and earnings) are received completely free of all income taxes! (As long as the account has been established for five years and the owner is at least age 59 ½.) Roth IRA withdrawals are also tax free if the owner is deceased or disabled or if the distribution will be used for first-time homebuyer expenses.

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