No matter your age, you’ve probably heard it before: it’s never too early to start saving for retirement. There’s a reason this saying is repeated so often. If you get ahead on your savings while you’re young, you will be thankful further on down the line. That said, you probably didn’t learn too much about retirement plans when you were in school. If you don’t know the first thing about individual retirement accounts, or personal IRAs, here’s a good place to start.
(Please note: this is about traditional IRAs, not Roth IRAs.)
What’s an IRA?
At its most basic level, an IRA is a tax-advantaged savings account for retirement. This means that you can put any pre-tax dollars into your IRA. But this does not mean you will never have to pay those taxes. You will pay these taxes on the back end—in other words, after retirement. But by that time, there’s a good chance you will be in a lower tax bracket. That is why people often refer to IRAs as “tax-deferred.”
In the meantime, you have the option to deduct your IRA contributions from your gross income for additional tax benefits. We hope this makes it clear why IRAs are an excellent form of financial planning.
Who can open one?
If you are under the age of 70 ½ and receive taxable income, you have the option to open a traditional IRA. This distinguishes them from other benefit savings accounts like 401(k)s and HSAs, which are provided by your employer. However, IRAs do have income and contribution limits, which vary on an annual basis. You should also keep in mind that if you do have a separate retirement plan offered by your employer, your contributions might not be deductible from your gross income.
You might be wondering if you can withdraw the money prior to retirement. The answer is that you can, but in almost all instances you will be hit with a 10% distribution fee. Of course, this is in addition to regular taxes on the amount of your withdrawal. When possible, it is definitely best to begin withdrawing money after turning 59 ½. Also, keep in mind that you are required to start withdrawals the year you turn 70 ½.
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 aim to decrease your taxes and increase your net worth through responsible, timely, and accurate record keeping. 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.