Self-directed individual retirement accounts (IRAs) are an effective, tax-favorable way to build long-term savings. These options allow investors more flexibility, control and investment options than employer-sponsored plans provide. There are two primary IRA types — traditional and Roth — and Accuplan is your experienced partner for both. Understanding the basic differences, features and benefits can help you decide which is best for your needs.
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Traditional IRA
You typically fund a traditional self-directed IRA with pretax money by deducting eligible contribution amounts from taxable income on your annual return. Nondeductible contributions are also possible.
Assets and earnings in these individual accounts are tax-deferred, meaning you’ll pay tax on the money once you begin withdrawing it. This solution may be suitable for investors anticipating a lower tax bracket in retirement.
Features and Benefits of Traditional IRAs
Traditional IRA features and benefits to consider include:
- The IRS allows annual contributions up to the allowable maximum the agency specifies.
- Income levels also set by the IRS determine whether your contributions are deductible or nondeductible, but earnings remain tax-deferred even if you can’t deduct the contribution.
- You won’t pay tax when withdrawing nondeductible contributions since the money has already been taxed once.
- All earnings distributions are taxable, regardless of whether the contribution was deductible or nondeductible.
- You may begin withdrawing funds without paying a penalty at age 59 ½.
- If you withdraw money before age 59 ½, a 10% penalty applies unless you meet the exception requirements.
- You must begin taking required minimum distributions (RMDs) annually when you turn 72.
Traditional IRA Eligibility Requirements
Retirement savers are eligible for a traditional IRA if they received a salary or compensation during the tax year. If the IRA owner and their spouse both receive a salary over the year, both can establish an IRA.
If a married couple files a joint tax return, only one person must have a taxable salary. They can contribute to an IRA on their nonworking spouse’s behalf.
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Roth IRA
Roth individual retirement accounts allow you to save for retirement with after-tax dollars. Distributions can be taken at age 59 ½ without penalty and tax-free after reaching the mandatory five-year deposit period. This tax-free advantage may be suitable for investors expecting a higher tax bracket during retirement.
Features and Benefits of Roth IRAs
Important considerations for Roth IRAs include:
- You can make annual contributions up to the IRS maximum but cannot deduct them on your tax return.
- Eligibility depends on income levels.
- It’s possible to convert money and assets from a traditional IRA into a Roth one to have a mix of tax-deferred and tax-free retirement savings.
- Following all IRS laws will ensure all contributions are 100% tax-free.
- Funds must remain in the account for five years to be removed without penalty or tax.
- Account holders pay no tax on earnings growth as long as they comply with the requirements.
- Roth IRAs have no RMD requirements.
Roth IRA Eligibility Requirements
A Roth IRA is similar to regular IRAs in that account holders must have received a taxable salary throughout the year. Roth tax advantages are provided to retirement savers if the following requirements are met:
- Taxable income was received.
- The Modified Adjusted Gross Income (MAGI) of the contributor does not exceed the set Roth IRA income limits.
If a married couple files a joint tax return, only one needs to have a taxable salary, and they can contribute to an IRA on their nonworking spouse’s behalf.
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Open Your Self-Directed IRA Online Today With Accuplan
Accuplan Benefits Services is an experienced provider of self-directed retirement accounts. Our team members have decades of industry service, giving them in-depth expertise in navigating the tax and IRS complexities. We help investors access additional asset classes beyond mainstream options to maximize their savings, and getting started is easy.
Open your preferred IRA type online today, or reach out to our specialists with questions.
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