An Individual Retirement Account (IRA) is just one of many ways to fund your retirement. As people become older, they want peace of mind knowing that they’ll never have to work again but can afford to live comfortably. A lot of small businesses want to offer their employees retirement plans, but often don’t know where to begin. That’s where we come in and help your small business tenfold. Our knowledgable and friendly team can walk you through the entire process of setting up retirement plans. We can go over the ins and outs in a way that’s not too challenging to understand. Today we’re going to explain what an IRA is, and what the three types of IRAs are.
What is an IRA?
We define an IRA as a tax-sheltered retirement account that you can set up a bank, an investment firm, insurance company, or through us. IRAs typically consist of stocks, bonds, mutual funds, bank deposit accounts, and many other types of investments.
Any individual who has salary or wage earnings is eligible for an IRA. Also, unemployed spouses can open up an account as well. Each year, the IRS has guidelines outlining the amount of money that can go into an IRA account. Factors include your income, income tax filing status, and age. For individuals over 50, the IRS does allow individuals to “play catch up” on their contributions each year.
3 Types of IRAs
- Traditional IRA: This account is beneficial because its contributions can be taken as tax deductions during the tax year that they are made. What these deductions do is reduce your gross income, thus lessening the load of your tax burdens. Contributions are tax-deferred until you withdraw any money.
- Non-deductible IRA: Your contributions to a non-deductible IRA are taxed as ordinary income in the year that you deposit it. These contributions cannot be deducted from your gross income. In other words, when you make withdrawals, you only pay income taxes on the earnings because your annual contributions were already taxed. For any individual ineligible for a traditional IRA or income exceeds the limit for a Roth IRA, a non-deductible IRA will be optimal. ***Note: In both traditional or non-deductible accounts, if you make a withdrawal before the age of 59, there is a 10% penalty fee.
- Roth IRA: A Roth IRA probably sounds very familiar to you. In 1998, the ROTH was established. At the time of withdrawal, earnings on your contributions are not taxable. After age 59, all or any part of a Roth IRA may be withdrawn and is income tax-free without any penalties. In some circumstances, the IRS does allow early, penalty-free withdrawals. Usually, there needs to be a qualified purpose, and withdrawals cannot be made until five years after you opened the account. Higher education and first home expenses are qualifying. Also, in other IRA accounts, you must withdraw funds by the time that you turn 70 so that funds will deplete based on the life expectancy for your age. However, with a Roth IRA, you can leave your account to your heirs without a penalty.
Contact Bowman & Company Today
Bowman & Company CPA, PC provides all of our individual and small business customers with experienced, accurate, and affordable financial services. Our financial services are aimed at decreasing your taxes and increasing your net worth through responsible, timely, and accurate recordkeeping. We offer our services to clients throughout the Washington, D.C. metropolitan area including Maryland and Baltimore County, Columbia, and Howard County. For more information on our offerings, contact us online or call us at (410) 381-8121. You can also find us on Twitter, Linkedin, Facebook, and Youtube.