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 from the IRS 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:
- Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.
IRA. This type of IRA that is
subject to the same rules as a traditional IRA but with certain exceptions:
- A taxpayer cannot deduct contributions to a Roth IRA.
- For some situations, qualified distributions are tax-free.
- 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.
As always, contact your Crosslin tax team at (615) 320-5500 with any questions you may have. We appreciate your business and are always here to help.