Retirement and Taxes: The Basics of IRAs

Individual Retirement Arrangements (IRAs) provide tax incentives for people to make investments that can provide financial security for their retirement. These can be set up with a bank, life insurance company, mutual fund, or stockbroker.

What you should know:

Contribution: The money put into an IRA. There are annual limits to these contributions that depend on age and type of IRA. Generally, a taxpayer or their spouse must have earned income to contribute to an IRA.

Distribution: The amount withdrawn from an IRA.

Withdraws: Taxpayers may face a 10% penalty and tax bill if they withdraw money before age 59 ½ unless they qualify for an exception.

Required distribution: There are requirements for withdrawing from an IRA:

• Someone must start taking withdrawals from their IRA when they reach age 70 ½.
• If a person’s 70^th birthday is on or after July 1, 2019, they do not have to take withdrawals until age 72.
• Special distribution rates apply for IRA beneficiaries.

Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.  

Roth 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.
• 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.