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Using your IRA as a retirement planning tool

Posted on October 16, 2023

Individual retirement accounts (IRAs) can provide tax incentives as well as an investment toward financial security upon retiring. IRAs let earnings grow tax-deferred.

Individuals pay taxes on investment gains only when they make withdrawals. In addition, depositors may be able to claim a deduction on their individual federal income tax return for the amount they contributed to an IRA.

What to know before investing in a traditional IRA:

  • traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible.
  • There are annual limits to contributions depending on the person’s age and the type of IRA.
  • Generally, the money in a traditional IRA isn’t taxed until it’s withdrawn.
  • When planning when to withdraw money from an IRA, taxpayers should know that:
    • They may face a 10% penalty and a tax bill if they withdraw money before age 59½ unless they qualify for an exception.
    • Usually, they must start taking withdrawals from their IRA when they reach age 73 (age 72 if they turned 72 in 2022). For tax years 2019 and earlier, that age was 70½.
    • Special distribution rules apply for IRA beneficiaries.

What’s the difference between a Roth IRA and a traditional IRA?
A Roth IRA is another tax-advantaged personal savings plan with many of the same rules as a traditional IRA, with a few notable exceptions:

  • A taxpayer can’t deduct contributions to a Roth IRA.
  • Qualified distributions are tax free.
  • Roth IRAs don’t require withdrawals until after the death of the owner.

Are there other types of IRAs?

Absolutely. Here are some of the most popular:

  • Simplified Employee Pension – A SEP IRA is set up by an employer that makes contributions directly for each enrolled employee.
  • Savings Incentive Match Plan – A SIMPLE IRA allows both the employer and employees to contribute to their individual plans. It is often a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.
  • Payroll Deduction IRA – Employees can set up a traditional or a Roth IRA with a financial institution and authorize a payroll deduction agreement with their employer.
  • Rollover IRA – The IRA owner receives a payment from their retirement plan and deposits it into an IRA within 60 days. This is often done when employees leave for a different job.

No matter what type of IRA plan you have, it’s good to know you have help with some level of retirement protection. The IRS.gov website offers a wealth of additional information:

Publication 590-A, Contributions to Individual Retirement Arrangements
Publication 590-B, Distributions from Individual Retirement Arrangements
Topic No. 557, Additional Tax on Early Distributions from Traditional and Roth IRAs
Topic No. 413, Rollovers from Retirement Plans
Topic No. 451, Individual Retirement Arrangements