What Is an IRA?
An IRA is an Individual Retirement Account; a way to save money for retirement. It allows you to put money into an account that becomes available to you when you reach a certain age. So when you retire, you’ll still get a “paycheck” (kind of). It will just come from your IRA instead of an employer.
There are two types of IRAs: the Traditional IRA and the Roth IRA. And here’s the difference:
Traditional IRAs are tax-deductible. So any money that you add to your retirement plan, you can deduct on your tax returns. The downside is that you’ll have to pay those taxes when you withdraw that money (when you retire).
A Roth IRA doesn’t have any tax breaks when you put your money in. BUT, your withdrawals are tax-free after the age of 59½.
Essentially, you can either pay your taxes now (Roth) or later (Traditional).
Any Other Differences?
Yeah, the amounts of money. There are limits on how much can be contributed to each IRA.
For a Traditional IRA, you can contribute $5,500 (or $6,500 if you’re age 50 or older) each year. And if you’re over 70 ½, you can’t put any more money in.
With a Roth IRA, you can contribute at any age.
The IRS says that with a Traditional IRA, you must start taking your money out by April 1 following the year in which you turn age 70½.
Roth IRAs have no distribution requirement, which means that if you win the lotto at 71, you can keep all the money you’ve saved in your IRA right where it is, with no penalty. You know, just in case.
Keeping It Simple
There are two types of employer/employee IRAs.
SIMPLE IRA Plan (Savings Incentive Match Plan for Employees):
- Allows employees and employers to contribute to Traditional IRAs set up for employees.
- Provides small employers with an easy way to contribute to their employees' and their own retirement savings.
- Employees can choose to move some money from their salaries into their IRAs that the employer is required to match. (So, kind of like free money from your boss for your lemonade sipping days.)
Simplified Employee Pension (SEP) Plan:
- The IRS labels these as SEP-IRA.
- Gives business owners a simplified (duh) method to contribute toward their and their employees’ retirement savings.
- Any business of any size – even if you are self-employed and your own boss – can create a Simplified Employee Pension.
Whew! Is There Anything Else?
Of course there is! The choices you make for your retirement can be complicated, but your financial health is worth taking the time to explore all your options. Our Glossary is a great place to start when it comes to understanding the definitions for the terms used to manage and secure your funds. And when it comes to the intersection of health, wealth, and the needs of North Carolina communities, we’re right here to try to shed some light on complicated ideas.