An IRA is a special savings account that allows you to set aside funds, that can be later used when you retire. The money in the account accumulates value over time. One option allows you to make withdrawals tax-free, while one version gives you access to tax deductions for any contributions made. Finding out which small business retirement account is right for you is crucial to set you on your path to a comfortable retirement.
Roth IRA in Personal Finance
The ROTH IRA gives you tax free withdrawals, if made before the age of 59 ½. This is only permitted if your account has been open for at least five years. Contributions made to the account can be withdrawn at any time. Contributions made are not considered tax deductible. The Roth IRA can be converted to a Roth IRA at any time. You must be under age 70 ½ in order to contribute to this type of IRA. You are not permitted to contribute more than you have earned in that particular year. If you are under the age of 50, you can contribute a maximum amount of $5,500.
Traditional IRA in Personal Finance
Earnings grow tax deferred until they are withdrawn at the age of 59 ½. When the withdrawals are made, the current federal income tax is assessed. Contributions can be tax deductible. Tax deferrals can mean that your contributions are taxed at a lower rate. At the age of 70 ½, you are required to take a required minimum distribution from the account. You are allowed to contribute to this type of an IRA at any time. You are not permitted to contribute more to your IRA than what you have earned for that year. If under the age of 50, you may contribute a maximum amount of $5,500 to your account.
Primary Difference Between the Two
The money that you contribute to your traditional IRA may be deducted from your taxes. A Roth IRA is supported by post-tax dollars, so deductions aren’t permitted. For your ROTH IRA, you can make a withdrawal on your earnings as long as they are made after you have reached 59 ½. The Traditional IRA requires that you be taxed whenever a withdrawal is made. The ROTH IRA must be opened for at least five years before a withdrawal can be made. The 10 percent federal tax rate is assessed on earnings for your ROTH IRA. The 10 percent federal tax rate is assessed on earnings and contributions for your Traditional IRA.
Contributing to Both IRAs
You are permitted to contribute to both types of small business IRAs at the same time. The combined amounts can not exceed your total allowable contribution amount for that calendar year. The total allowable amount is $5,500 for everyone under the age of 50. People over the age of 50 can contribute $6,500 annually.
IRAs are savings accounts that allow you to put aside savings that grow until withdrawn at the retirement age. Your contributed amount cannot exceed the calendar year’s allowable amount. The earnings grow tax deferred in the account for years and benefits those who start earlier.
For more information on which plan might be right for you, feel free to contact us at 1-770-478-8881.
Tom serves as the Financial Consultant for Heritage Bank. In partnership with LPL Financial Services, he assists individuals, families and business owners with all aspects of financial planning including retirement.
LPL Financial Consultant • 678-284-3302 • [email protected]