Some people may wonder about Individual Retirement Accounts (IRAs) as tax season closes. So, what is an IRA, what are the benefits, and how does it work? This article will guide you in discussing all those questions and more. It will also provide a few tips on how to get started with an IRA. Alternatively, you can also check these IRA resources. So if you’re curious about IRAs, keep reading!
What is an IRA?
It is a type of investment account that offers tax advantages for retirement savings. It is available in two main types: traditional and Roth.
Traditional IRAs offer tax-deferred growth on your investments, meaning you don’t pay taxes on the money until you withdraw it in retirement. Roth IRAs offer tax-free growth on your investments, meaning you pay taxes on the money when you contribute but not when you withdraw it in retirement.
How Does IRA Work?
IRAs are typically savings accounts that come with tax benefits. Contributions to it are typically tax-deductible, and the money in the account can grow tax-free until it is withdrawn. With a traditional IRA, contributions are tax-deductible, and withdrawals are taxed as income.
With a Roth IRA, both contributions and withdrawals are non-tax-deductible. To qualify for the tax benefits of an IRA, you need to meet specific income and contribution limits. For example, in 2020, the maximum contribution limit for an IRA is $6,000 ($7,000 if you’re over age 50).
Anyone can open an IRA, but there are often restrictions on how you can use the money. You can also check IRA resources to know about regulations before opening an account.
FAQs About IRA
How Much Can You Contribute to an IRA?
It depends on a few factors, including age and income. If you’re below 50 years old, your maximum contribution is $6,000 annually. If you’re 50 or older, the maximum contribution is $7,000 annually. Income also influences how much you can contribute to an IRA.
Can You Contribute to It If a Retirement Plan Covers You at Work?
Yes, you can contribute to a traditional IRA or Roth IRA even if a retirement plan at work covers you. The amount you can contribute to either type of IRA may be limited, depending on your income and filing status. For example, if you’re single and covered by a retirement plan at work, you can contribute the full amount to a Roth IRA if your modified adjusted gross income is less than $183,000. If your income is between $183,000 and $193,000, you can still contribute to a Roth IRA, but the amount will be reduced.
Is Your IRA Contribution Deductible on Tax Return?
Individuals who file taxes may be eligible to deduct their IRA contributions on their tax returns. It allows a deduction for traditional IRA contributions, as well as for Roth IRA contributions. To qualify for the deduction, taxpayers must meet specific criteria, such as having earned income and not being covered by a retirement plan at work.
Additionally, the deduction is subject to a phase-out for high-income taxpayers. For example, in 2019, the deduction is phased out for couples filing jointly with an adjusted gross income of $193,000 or more and for single filers with an adjusted gross income of $122,000 or more.
Remember, retirement accounts are intended to ensure you have an adequate amount of funds by the time you retire. So make sure you do not withdraw funds from it while on the job.