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: $7,500
- 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Generally 10% if funds are withdrawn before age 59½ (income tax may also apply).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