What is IRA

What is an IRA?

An individual retirement account (IRA) is a retirement savings account that offers tax breaks. It allows contribution with tax-free growth or on a tax deferred basis.

How Many types of IRAs?

There are two types Traditional and Roth IRA. 

1-Traditional IRAs-  You can make pre tax contributions and earnings on Investments can grow tax deferred until withdrawn. You pay income tax when you make withdrawals.

2-Roth IRA- A Roth IRA is an Individual Retirement Account in which contributions are made with after-tax dollars. While there are no current-year tax benefits, your contributions and profit grows tax-free. You can withdraw them tax and penalty-free after age 59½. You can also withdraw contributions penalty and tax free once the account has been open for five years. More information about Roth IRA. 

How do I open a traditional IRA account? 

You can open a IRA account with any online brokerage firms, mutual fund companies and bank. Please pay attention to their management fees and opening requirements to make sure you get a good deal.

How much I can contribute every year?

You can contribute up to $6,000 in 2022 and up to $6,500 in 2023, even if you’re also contributing to a 401(k) or other workplace savings plan. Those 50 or older can contribute an additional $1,000 per year. Generally, you (or your spouse) must have earned income to contribute to an IRA.

Do I get tax deduction for the contribution I make?

Yes, you do.  Let’s assume your income is $65000 and you contribute $6000 to your traditional IRA. You taxable income will be $58,000 on your tax return. However, if your income is more than government’s threshold, your tax deduction begins to phase out. Effect on your Adjusted gross income if you not covered by retirement plan at work

 When I can take distribution from my traditional IRA account?

  • You can start taking distributions from a traditional IRA when you reach age 59 1/2.
  • You pay regular income tax on distributions from your traditional IRA
  • If you take money out of your traditional IRA before age 59 1/2, you may have to pay a 10% early withdrawal penalty. There are some exceptions
  • You don’t have to start taking distributions from your traditional IRA just because you reached your 59 1/2 birthday. You can wait until you reach age 72.

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