When it comes to retirement planning an IRA (Individual Retirement Account) adds value to your nest egg. When strategizing an IRA, there are different options to choose from, along with different tax consequences when you contribute and withdraw the funds. Below outlines the basics of the different types of IRA’s.
- Traditional IRA: A traditional IRA allows for a tax deduction for the amount contributed during the year. The earnings grow tax-free in the account and you pay taxes once you withdraw the funds. A taxpayer is required to withdraw a minimum amount each year once they reach the age of 72.
- Contribution Limit for 2021: $6,000, or $7,000 if at age of 50 or older
- Modified adjusted gross income limit for 2021: $76,000 for single taxpayers and $208,000 for married filing jointly taxpayers. If a taxpayer is not covered by an employer retirement plan and has earned income, then there is no income limit.
- Nondeductible Traditional IRA: A nondeductible traditional IRA is funded with an after-tax contribution (no tax deduction in the year of contributing). The earnings grow tax-free in the account, and you pay taxes on a pro rata amount once withdrawn. The tax free portion on the withdraw is a portion of your accumulated contributions. A taxpayer is required to withdraw a minimum amount each year once they reach the age of 72.
- Contribution Limit for 2021: $6,000, or $7,000 if at age of 50 or older
- Modified adjusted gross income limit for 2021: There are no income limits for a nondeductible traditional IRA.
- ROTH IRA: A ROTH IRA is funded with after-tax contributions (no tax deduction in the year of contributing). The earnings grow tax-free in the account and the withdraw amount is not taxable. Currently, there is no required minimum distribution for ROTH IRA.
- Contribution Limit for 2021: $6,000, or $7,000 if at age of 50 or older
- Modified adjusted gross income limit for 2021: $140,000 for single taxpayers and $208,000 for married filing jointly taxpayers
There are other rules that may apply to your specific tax circumstance. As always, if you have any questions or concerns, please reach out to our staff for further assistance.