Teipen CPAs on IRAs
Posted on September 15, 2021
Lots of folks pay into Individual Retirement Accounts over a lifetime. And many depend on them to make retirement living more comfortable. But, like everything else in life, there are many different types of IRAs that function differently, depending on the income level and tax situation of the IRA owner.
Here’s the skinny on IRAs:
What it is: An IRA is a retirement account that exists to provide tax incentives for people to make investments to provide financial security for their retirement years. An IRA account can be set up through a bank or other financial institution, a life insurance company, mutual fund, or stockbroker.
How it works:
- The money that a taxpayer puts into his/her IRA is called a contribution. The IRS has annual limits to contributions depending on a taxpayer’s age and the type of IRA.
- The amount that someone withdraws from his/her IRA is called a distribution.
- Because IRAs are set up as a retirement account, taxpayers generally face a 10% penalty and a tax bill if they withdraw money before age 59 ½, unless they qualify for an exception.
- Once retired, however, there are requirements for withdrawals:
There are different types of IRAs to fit various requirements:
- Traditional IRA contributions are generally tax-deductible. Money put into a traditional IRA is not taxed until it is withdrawn.
- Roth IRA is structured differently, tax-wise. This type of IRA is subject to the same rules as a traditional IRA but with certain exceptions:
- A taxpayer cannot deduct contributions to a Roth IRA.
- Qualified distributions are tax-free (because the money is already taxed as income).
- Roth IRAs do not require withdrawals until after the death of the owner.
- Savings Incentive Match Plan for Employees, is more commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.
- Simplified Employee Pension is also known as a SEP-IRA. An employer can make contributions toward his/her own retirement and their employees’ retirement. The employee owns and controls a SEP.
- Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.
IRAs are anything but simple. This is especially true when it comes to determining when to begin taking money from an IRA for retirement, and understanding how those withdrawals affect your tax situation.
For more information on IRAs, go to IRS.gov Individual Retirement Arrangements, or schedule an appointment with a Teipen Group CPA. We can help you set up a tax-friendly withdrawal (or contribution) plan that works for you.