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Many taxpayers may have heard of Individual Retirement Arrangements, or IRAs, but some don’t know how IRAs help them save for retirement.
People can set up an IRA with a bank or other financial institution, a life insurance company, mutual fund or stockbroker. Here’s a list of basic terms to help people better understand their IRA options.
• Contribution. The money that someone puts into their IRA. There are annual limits to contributions depending on their age and the type of IRA.
• Distribution. The amount that someone withdraws from their IRA.
• Required distribution. There are requirements for withdrawing from an IRA:
o Someone generally must start taking withdrawals from their IRA when they reach age 70½.
o Per the 2019 SECURE Act, if a person’s 70th birthday is on or after July 1, 2019, they do not have to take withdrawals until age 72.
o Special distribution rules apply for IRA beneficiaries.
• Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.
• Roth IRA. This type of IRA that is subject to the same rules as a traditional IRA but with certain exceptions:
o A taxpayer cannot deduct contributions to a Roth IRA.
o For some situations, qualified distributions are tax-free.
o Roth IRAs do not require withdrawals until after the death of the owner.
• Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.
• Simplified Employee Pension. This is known as a SEP-IRA. An employer can make contributions toward their own retirement and their employees’ retirement. The employee owns and controls a SEP.
• Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.
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