An Individual Retirement Account (IRA) is a personal savings account designed to help individuals save for retirement with tax advantages. IRAs are owned by the individual and are separate from employer retirement plans like 401(k)s.
🔍 Key Types of IRAs
| Type | Description |
|---|---|
| Traditional IRA | Contributions may be tax‑deductible. Withdrawals in retirement are generally taxable. |
| Roth IRA | Contributions are made with after‑tax dollars. Qualified withdrawals in retirement are tax‑free. |
| SEP IRA | Designed for self‑employed individuals and small business owners. Allows higher contribution limits funded by the employer. |
| SIMPLE IRA | For small businesses with fewer than 100 employees. Requires employer contributions and allows employee salary deferrals. |
📌 Quick Facts
- Contribution Limits
Set annually by the IRS.- Most individuals under age 50: $6,500
- Age 50 and older (catch‑up): additional $1,000
- Early Withdrawal Penalty
Generally 10% if funds are withdrawn before age 59½ (income tax may also apply). - Required Minimum Distributions (RMDs)
- Traditional IRAs require withdrawals starting at age 73
- Roth IRAs have no RMDs during the owner’s lifetime
🧠 Why It Matters
- Traditional IRA contributions may reduce taxable income
- Roth IRA contributions are not deductible, but qualified withdrawals are tax‑free
- SEP and SIMPLE IRAs affect self‑employment or small business returns
- Correctly identifying the IRA type ensures:
- Proper reporting of contributions
- Accurate treatment of distributions
- Correct handling of penalties or RMDs
💡 Tips
- A contribution being made does not automatically mean it’s deductible
- Roth IRA eligibility depends on income limits