Individual Retirement Account (IRA) - Just the Basics

| March 01, 2018
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An IRA is a personal savings account that offers you tax incentives to save for retirement. There are two types of IRAs:
The Traditional IRA allows you to get a tax deduction for your contribution. When you make a tax deductible contribution, you reduce your taxable income for the year, so the dollars that you contribute are pretax.

For example, a person in the 24% tax bracket making a $5,500 deductible IRA contribution would save themselves $1320 in taxes ($5,500 x 24% = $1320). Those dollars will not be taxed until you withdraw them from the IRA. Your ability to make a deductible contribution to a traditional IRA depends on your annual income, and whether you (or, in some cases, your spouse) are covered by an employer-sponsored retirement plan. For example, if you are married filing a joint return, and are covered by a company retirement plan, your ability to get a tax deduction starts phasing out when your income gets to $101,000 and is completely phased out at $121,000 for 2018.

With the other type of IRA, called the Roth IRA, you get no up-front tax deduction for your contribution, but your money grows tax-free and comes out tax free. You have to qualify for a Roth IRA, and whether or not you can contribute to one depends on your annual income. For example, a married couple’s ability to contribute to a Roth IRA starts phasing out when their income gets to $189,000 and goes away entirely when they get to $199,000 for 2018.

You can contribute up to $5,500 ($6,500 if age 50 or older) to either the Traditional or Roth IRA in 2018 (this is unchanged from 2017). You may also be able to contribute up to the same amount for a non-working spouse, based on the income of the working spouse.

A 10% early penalty tax is generally assessed on distributions you take from a traditional or Roth IRA prior to age 59½. Which type of IRA is right for you? There is no easy answer. You have to analyze your situation and determine which type of IRA offers the best fit for you.


The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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