Understanding IRAs: Terms to Know

Nov 4, 2022 | Tax & Accounting

Understanding IRAs: Terms to Know

IRAs, or Individual Retirement Arrangements, provide tax incentives for people to make investments that can provide financial security for their retirement. To help people better understand this type of retirement savings account, here’s a basic overview of terms to know:

Contribution. The money that someone puts into their IRA. There are annual limits to contributions depending on their age and the type of IRA. Generally, taxpayers or their spouses must have earned income to contribute to an IRA.

Distribution. The amount that someone withdraws from their IRA.

Withdrawals. Taxpayers may face a 10% penalty and a tax bill if they withdraw money before age 59 ½ unless they qualify for an exception.

Required distribution. There are requirements for withdrawing from an IRA:

  • Someone generally must start taking withdrawals from their IRA when they reach age 70 1/2.
  • Per the 2019 SECURE Act, if a person’s 70th birthday is on or after July 1, 2019, they do not have to take withdrawals until age 72.
  • Special distribution rules apply for IRA beneficiaries.

Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.

Roth IRA. This type of IRA is subject to the same rules as a traditional IRA but with certain exceptions:

  • A taxpayer cannot deduct contributions to a Roth IRA.
  • Qualified distributions are tax-free.
  • Roth IRAs do not require withdrawals until the owner dies.

Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.

Simplified Employee Pension. This is known as a SEP-IRA. An employer can contribute toward their own retirement and their employees’ retirement. The employee owns and controls a SEP.

Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.

Understanding the tax implications of your retirement planning choices is essential. If you haven’t started saving for retirement, call the office and speak to a tax professional who will help you figure out a plan that works for you.

Recent Posts

Traveling for Business in 2024? What’s Deductible?

Traveling for Business in 2024? What’s Deductible?

If you and your employees will be traveling for business this year, there are many factors to keep in mind. Under the tax law, certain requirements for out-of-town business travel within the United States must be met before you can claim a deduction. The rules apply...

How to Secure a Tax Benefit with the QBI Deduction

How to Secure a Tax Benefit with the QBI Deduction

QBI may sound like the name of a TV quiz show. But it’s actually the acronym for “qualified business income,” which can trigger a tax deduction for some small business owners or self-employed individuals. The QBI deduction was authorized by the Tax Cuts and Jobs Act...

Tracking Down Donation Substantiation

Tracking Down Donation Substantiation

If you’re like many Americans, your mailbox may have been filling up in recent weeks with letters from your favorite charities acknowledging your 2023 donations. But what happens if you haven’t received such a letter for a contribution? Can you still claim a deduction...

There May Still Be Time to Lower Your 2023 Tax Bill

There May Still Be Time to Lower Your 2023 Tax Bill

If you’re preparing to file your 2023 tax return, you may still be able to lower your tax bill – or increase your refund. If you qualify, you can make a deductible contribution to a traditional IRA right up until the original filing deadline, April 15, 2024, and see...