Understanding IRA – Traditional, Roth, and Rollover IRA

IRA stands for Individual Retirement Account. If your employer offers a 401k plan, you should first participate in it and try to maximize your contribution up to the limit set by the IRS for a given year. See “Know Your Paycheck” for more details. Once you have accomplished it, if you have additional money available at the end of the year, you could consider investing in an IRA.  This could help in two ways:

  1. You are saving more for retirement.
  2. You could deduct your contribution to the IRA for the year and thus pay less in taxes.

Now let’s take a took at the types of IRA available:

Traditional IRA:

  • You can contribute up to $5500 from per year; $6500 if you are 50 or older.
  • You or your spouse must have earned the money.
  • You can deduct your contributions if you meet the IRS criteria.
  • You contribution grows tax free.
  •  If you withdraw before age the age of 59.5, then you have to pay taxes and penalty for early withdrawal.
  • You must start taking required minimum distributions from the age of 70.5 years.

Roth IRA:

  • If your income is below the IRS criteria, you can contribute up to $5500 from per year; $6500 if you are 50 or older.
  • You or your spouse must have earned the money.
  • You contributions are not deductible.
  • You contribution grows tax free.
  • You can withdraw the contribution you made tax free.
  • There is no required minimum distribution age.

 

Rollover IRA:

When you switch jobs, what happens to your 401k? Typically, you could still have your 401k account held by the former employer sponsored brokerage firm. You could just let it sit there and start out with a new 401k with your new employer. Over the course of your career, you may switch five to seven jobs.  It doesn’t make any sense to be have five to seven 401k accounts though there is nothing stopping you from doing it.

This where Rollover IRA comes into the picture. You could “Rollover” your 401k contributions to a Traditional IRA account at the brokerage firm of your choice. As you make career changes, Rollover IRA provides a way to consolidate your investments into a single IRA account.

Check the IRS Website to dig deeper into IRA’s.

 

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