Individual Retirement Accounts (IRAs)
IRAs are a good way to save for retirement. And, it should never be left unsaid, open your IRA early in life. If you didn’t, open it now. IRAs can be good tax shelters and they are instruments that are difficult to dip into until you retire. I’ll start with some IRA basics in this post. If you have more detailed questions, give our IRA experts a call at 316.265.3272 or 1.800.256.8049. And always, check with your tax professional to make sure the investment you’re planning on makes sense for your tax situation.
Eligibility and Types of IRAs
You can open a Coverdell Education Savings Account (CESA) for your child’s higher education. These can also be opened by other family members, like a grandparent or aunt/uncle. The child must be under 18 years of age and total contributions cannot exceed $2,000 in any calendar year, regardless of the number of CESAs established for the child.
Traditional IRAs can be opened for retirement purposes if you have earned income (or your spouse has earned income). If you meet that criteria you can open a Traditional IRA that allows you to defer taxes on the earnings of your contributions until you withdraw them. Some contributions may be tax deductible in the tax year they are made. Think of these IRAs as a certificate of deposit, with limitations on withdrawals, and sometimes they earn a higher rate. You can choose the length of the investment, but when it matures, you choose another term, as the funds stay in the account and are only available to you if you are 59 ½ or greater at the time of withdrawal or in some hardship cases. Early withdrawals trigger a tax penalty when taxes are filed.
You can also invest in a ROTH IRA. These are different from Traditional IRAs, as Roth contributions are non-deductible and taxed as income in the year they are earned. Once you have a 5-year holding period of your Roth, it features tax-free withdrawals for specific distribution reasons. If you expect to be in a higher tax bracket when you retire, a Roth IRA may provide a benefit over a traditional one.
Roth Eligibility Requirements:
- Must have earned income, or your spouse must have earned income
- Your modified adjusted gross income (MAGI) cannot exceed certain prescribed limits.
Roth Tax Free Withdrawal Distribution Reasons Include:
- You are older than 59 ½
- Permanent disability
- First-time home purchase
- In the event of the Roth owner’s death
IRAs also feature an extended period each year to make contributions. If your tax year is January 1 – December, you can make contributions from January 1 through tax filing day of the next year. For example, 2020 IRA contributions can be made January 1, 2020 through April 15, 2021.
The maximum contribution you can make to all of your Traditional and Roth IRAs combined for 2020 is $6,000 for those under age 50 and $7,000 if you’re 50 or older. Your contributions cannot exceed your taxable income. Always be sure to check on the IRS website or with your tax consultant, as maximums can adjust from year to year. The IRA contribution limit does not apply to Rollover contributions, nor Qualified Reservist Repayments.
How do IRAs work with my employer’s retirement plan? You can still contribute to a Traditional or Roth IRA, but you may not be able to deduct all your traditional IRA contributions when you file your taxes. Please check with your tax advisor.
You can set up a beneficiary for your IRA. Should your death precede the payout of all IRA funds, the funds will go directly to your beneficiary(s) and do not need to be part of a will or court proceedings.
If you want to combine or move IRAs to/from another institution, CUA can help. Please visit with an IRA expert before moving funds so you can avoid unnecessary IRS penalties.
IRAs can seem complicated and there is a bit of paperwork to set them up. CUA’s IRA experts can explain the IRA process, rules, and limitations, and then carry out your directions. Areas of question or uncertainty should always be referred to your tax advisor so you open the perfect IRA for your situation.