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What Are IRAs?

An IRA (Individual Retirement Account) is an account intended for long term savings available to anyone with earned income. You can add funds to this account throughout your lifetime and enjoy your savings during retirement years. In some ways this is similar to a 401k but with greater investment opportunities. Additionally, a 401k is typically established by an employer and grows as they contribute funds whereas an IRA is set up by an individual.

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IRAs must be opened at an established financial institution certified by the IRS. When an IRA is opened, the account owner decides where to invest their money from a wide variety of options including stocks, bonds, or financial products. You can also spread out your investments to lower your risk. IRAs are insured by the Federal Deposit Insurance Corporation (FDIC) and as such are a safe way to protect your assets. There are different kinds of IRAs with different rules for qualification, withdrawals, and taxes.

Types of IRAs

Traditional IRAs are tax deductible but have a maximum contribution limit of $6,000 per year. Even if you own multiple IRAs, $6,000 is the total amount that an individual can contribute in a year. Any interest earned in your IRA can grow tax-deferred until withdrawals are made.

 

A Roth IRA is paid into with contributions which have already been taxed. Contributions can be made for as long as you want and your after-tax dollars cannot be taxed upon withdrawal. If you don’t need the money you are not required to withdraw it at any point. There are income requirements to a Roth IRA to reserve these benefits for the average worker. Single filers must make less than $144,000 a year and joint filers cannot exceed $215,000.

 

A Simple IRA is established by a small business owner or an individual who is self employed. Both the employer and employee make contributions to the account. Contributions are tax deductible.

Simplified Employee Pension (SEP) IRAs are similar to traditional IRAs with some adjustments for self-employed individuals.

 

As previously mentioned, this type of account is intended for long term savings. Any funds withdrawn before the account holder turns 60 will automatically be subject to a penalty as high as 10%. Keep in mind that you will also be taxed at the time of withdrawal. The longer your money stays in the account the more potential it has for growth. 

 

When the account holder turns 72, they will be required to start taking required minimum distributions (RMDs) which are calculated according to the size of the IRA and their life expectancy.

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We understand how important it is for you to know all about your retirement options. That’s why we can help you find the best option that works for you. To learn more about IRAs and how they may benefit you, reach out to us today!

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We are not connected with or endorsed by the United States government or the federal Medicare program. We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all your options. American Family Solutions is an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any comments regarding safety and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company. No legal advice, options or recommendations are being made in respect to this proposal. You should consult your tax professional or attorney concerning such advice and opinions.