Individual retirement accounts (IRAs) offer a tax-advantaged way for you to save for retirement or other needs, while also enabling the money you invest to grow. They provide a great opportunity for you to supplement what you may already be saving through other types of plans. There are three types of IRAs:
- Traditional IRA
This enables you to contribute pre-tax dollars – generally up to $4,000 per year, per person* – into a fund that grows, tax-deferred. Assets can be withdrawn, without penalty, at age 59-1/2 or older; withdrawals must begin no later than age 70-1/2. Taxes are paid on withdrawals at the normal rate at retirement age. If money is withdrawn early, a 10% penalty will be assessed. There are three exceptions to this: money withdrawn for a first-time home purchase, up to a lifetime maximum of $10,000 of all IRA assets; and money withdrawn for qualified higher education expenses; money withdrawn in substantially equal periodic payments for an early retirement. - Roth IRA
This enables you to contribute after-tax dollars – generally up to $4,000 per person per year if you make $95,000* or less annually – and then receive the earnings tax-free at retirement if you are age 59-1/2 or older, and have had the account open at least five years. Unlike traditional IRAs, Roth IRAs offer you the flexibility of making continued contributions after reaching age 70-1/2, and do not require you to take a minimum distribution after age 70-1/2. Contributions to a Roth IRA (as opposed to earnings) can be withdrawn at any time, for any purpose, without being taxed. In most cases, there also will be no penalty. Providing the account has been open for at least five years, you also may withdraw up to a lifetime maximum of $10,000 in all IRA assets, without tax or penalty, for a first-time home purchase. - Education IRA
This enables you to contribute after-tax dollars – generally up to $2,000 per year, per child if you earn $95,000* or less annually – and to use the earnings, tax-free, for higher education expenses. One education IRA can be established for each child under age 18. After age 18, contributions may no longer be made. Assets from the account may be withdrawn tax-free up to age 30, as long as the money is used for qualified higher education expenses (tuition, room and board, books, supplies, etc.). If the assets are withdrawn for purposes other than education, you may pay a 10% penalty and income taxes on the amount withdrawn. If all funds are not used by age 30, they can be rolled over into a new education IRA for a family member of the original beneficiary. Education IRAs can be purchased by any adult for any child, as long as the child is the beneficiary of only one education IRA.
*There are many variations on the amount of IRA contributions you can make, based on your income, tax filing status and type of IRA. Please consult with your tax advisor and Brooks’ financial services department for complete details and information.
Bethel Fisher & Company Financial Services, Inc does not provide legal or tax advice
