When it comes to retirement, an Individual Retirement Account (IRA) is a great way to build your nest egg and supplement your income in your retirement years. Simply put, an IRA is a savings account that offers tax breaks and compound interest which help your earnings grow even faster. The specific tax benefit will depend on which IRA you choose, and your personal tax situation.*
Types of IRAs
There are two basic types of IRAs – Traditional and Roth. There are significant differences between the IRA types, and it is best to consult a tax professional to help you determine which IRA will help you live better.
- With a Traditional IRA, you pay taxes when you take distributions in retirement (or if you make withdrawals prior to retirement), however, your contributions may be tax-deductible.
- With a Roth IRA, you pay taxes up front, because your contributions are not tax-deductible. As a result, federal taxes do not have to be paid on distributions of the amounts contributed. Earnings may also be non-taxable if certain conditions are met. Therefore, the longer you have until retirement, the greater the tax break potential.
Rules and restrictions
To make contributions to a Traditional IRA, you must be younger than 70½ for the entire tax year, and you (or your spouse) must have earned income. To make contributions to a Roth IRA, you (or your spouse) must have earned income and your Modified Adjust Gross Income (MAGI) cannot exceed certain limits (see MAGI chart). These limits may change yearly subject to cost-of-living adjustments (COLAs).
Deadline to contribute to IRA
The deadline for regular and catch-up IRA contributions is your federal income tax filing due date, excluding extensions (usually April 15th). You can contribute to both a Traditional and a Roth IRA in the same tax year, but the contribution limit applies to both IRAs. For instance, if you are 30 years old, and contribute $2,500 to your Traditional IRA, you can only contribute $3,500 to your Roth IRA. You are also subject to contribution and deduction limits.
Once you reach age 59½, you may take IRA distributions from your Traditional or Roth IRA without being assessed the 10 percent early withdrawal penalty tax. If you have not reached age 59½, there are certain situations where the penalty tax will be waived.
Visit IRA Info Center for more information. You can also visit a branch or call us at (800) 877-8328 for learn more.
IRA Info Center
*The information is not intended to provide legal advice. For specific information related to your individual circumstances, we encourage you to consult a tax professional.