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Everything You Need to Know About IRA’s

May 27, 2019

An IRA, or Individual Retirement Arrangement is the investment of money that is tax-deferred for a safe financial retirement. IRA’s come in a variety of forms such as: Traditional, Roth, Simple, SEP, and Payroll Deduction. Below is a breakdown of what each of these different types of IRA’s entail, their limitations, and benefits.

 

Tradition and Roth IRA Plans:

  • You may have an annual contribution limit of $5,500 if you are under the age of 50. If you over the age of 50 you may have an annual contribution limit of $6,500 (2018 standard).

  • If you reach the phase out range, your annual contribution limit will be reduced.

  • These may be set up through a bank, life insurance company, mutual fund, or stock broker.

  • You can contribute to both traditional and roth IRA’s, but they may not exceed the annual limits.

 

Traditional IRA:

A traditional IRA is tax deductible when contributions are being made. The retirement distributions are subject to tax when they are disbursed. A traditional IRA is contributed pretax.

 

Traditional IRA Phase Outs:

No phase out exists for a single or head of household with no other qualified retirement plan. The phase out of a single or head of household with another qualified retirement plan is $63,000-$73000. The phase out for married filing jointly where both spouses have another qualified retirement plan is $101,000-$121,000. No phase out exists if married filing jointly and both spouses have no other qualified retirement plan. In the event of married filing jointly with one spouse having another qualified retirement plan, the phase out for a spouse with a qualified retirement plan with joint adjusted gross income is $101,000-$121,000. A spouse with no qualified retirement plan has a phaseout occur when the joint adjusted gross income is $189,000-$199,000.

 

Disbursement of the Traditional IRA:

A traditional IRA is considered taxable as normal income. A ten percent penalty will be charged if you withdraw from your IRA before your are 59 ½ years old. However, under some circumstances there are penalty-free withdrawals. These include, but are not limited to disabilities, paying for higher education, funds due to the IRS levy. One must start taking disbursement at the age of 70 ½.

 

The following is a simplified breakdown of other commonly witnessed IRA types. We recommend consulting your accountant when determining which IRA is right for you or if you simply want to learn more about them.

 

Roth IRA

  • Roth IRA- The contribution to the Roth IRA are tax and the distribution is not taxed.

  • Roth IRA AGI phase out:

    • Single or Head of Household $120,000-$135000.

    • Married filing jointly $189,000-$199,000.

    • Married filing separately (special rules apply)

Roth IRA Disbursement

  • Tax free disbursements.

  • May be disbursed on or after the age of 59 ½.

  • Disbursed to a beneficiary or participant’s estate on or after the participant’s death.

  • Disbursement can be made if the participant becomes disabled.

  • Used to pay qualified first-time home-buyers expenses.

 

SEP IRA (Simplified Employee Pension)

  • Type of traditional IRA for self-employed or small business owners.

  • Employer Contribution limit is up to 25% of employee's total compensation.

  • Self-employed individuals are usually limited to 20% of their net income.

  • Contributions are deductible for employers.

  • The employee contributions are the same as the traditional and roth IRA.

 

Simple IRA

  • For self-employed or any employer with 100 or less employees.

  • Both Employer and employee may contribute with and annual limit of $12,550 under the age of 50. May contribute $15,500 if over the age of 50 (2018 standard).

  • Requires employer to match the employee compensation for the first three percent or two percent of each eligible employee.

 

Payroll Deduction IRA

  • Deducted from employee's pay and put into a traditional IRA.

  • Contribution limits are the same as a Traditional and Roth IRA.

  • Follows the distribution rules of the traditional and roth IRAs.

  • Follow the same tax advantage as both traditional and roth IRA.

  • No costs to the employer but employees must pay a $10 set up fee and a $10 annual maintenance fee.

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