Understanding IRAs

 In Planning, Goodman Financial Insights

Saving for retirement is essential to financial freedom. Understanding your options sets you up to make educated decisions you can be confident in. That’s why we’re taking the time to help you unpack Individual Retirement Accounts.

Traditional IRA

Traditional IRAs are considered tax-deferred earnings. This means that taxes on the account are due at withdrawal according to regular rates at the time, giving you a tax break for the year in which these savings are deposited and growing. Required withdrawals for traditional IRAs begin at age 72. Traditional IRAs have no contribution requirements, only limits. For individuals under 50, it’s $6,000 a year, while individuals over 50 can save up to $7,000. Contributions may be tax deductible, subject to limitations.

Roth IRA

With a Roth IRA, contributions are made with after tax dollars. No taxes are paid at withdrawal because all taxes are paid at the time of deposit. There is no required withdrawal, unlike traditional IRAs. There are, however, adjusted gross income (AGI) limits. This means individuals can only contribute to the full limit in 2020 if their AGI is less than $124,000 for singles and $196,000 for married couples filing jointly. Like Traditional IRAs, the contribution limit per year for those under 50 is $6,000 while those over 50 can save up to $7,000. Roth IRAs not tax deductible. As an added bonus, contributions can be withdrawn without penalty.

SEP IRA

This form of IRA is available to small businesses that do not feel they are ready to establish a 401K.  With this IRA, it is the employer that is contributing and not the employees. The contributions for 2020 can be any amount up to the lesser of 25% of the employee’s compensation (or net business income for sole proprietors) or $57,000.

Ultimately, it’s up to your discretion and evaluation when exploring IRA options. When it comes to savings, the best time to start is now.

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