Gold-IRA-Companies.com is committed to helping you make informed decisions so that you can ensure your financial safety. An IRA, which stands for “Individual Retirement Account,” is a part of many retirement plans. An IRA allows you to invest a certain part of your income. Depending on your tax-filing status and income, you may contribute up to $5,000-$6,500 per year.
These limits were introduced in 2016 in response to inflation. Such contributions are traditionally tax deductible. However, any contributions can bring returns on a tax-deferred basis, until you retire and decide to withdraw them.
Withdrawals from the IRA will be taxable if you start to withdraw at the age of 59 ½. If you belong to a lower tax bracket, you can delay this tax payment. Withdrawals become mandatory at the age of 70 ½. If you have different assets in your IRA, you can choose a certain asset and decide which amount of funds you want to withdraw, as well as when you’re going to do it. Another advantage of an IRA is that it isn’t associated with the customer’s workplace or employer. Every account is created for a particular person.
IRAs support various types of assets. The most common options are mutual funds, bonds, and stocks. However, self-directed IRAs allow you to hold other types of assets as well, including real estate and precious metals. You can invest in any asset type that is allowed by a custodian institution. Because of their subjective values, you are not allowed to hold collectibles (e.g. coins or antiques) and cash-value life insurance in an IRA.
According to research by the Investment Company Institute, about a third of Americans have some kind of an IRA. IRAs were established by the Employee Retirement Income Security Act (1974), and now they account for the biggest share of retirement assets. IRA retirement assets are worth $7.3 trillion in total, while defined contribution plans like 401(k)s totaled $6.7 trillion in 2015. As the popularity of employer-provided plans and pensions declines, IRAs become the most common investment tool.
How to Fund an IRA
Most taxpayers are allowed to contribute up to $6,500 per year, in case of Traditional and Roth accounts. However, if you want to contribute more than $5,500, you should be over 50 ½ years old. If you have a SEP IRA, you can contribute either $55,000 a year or 25% of your income. There are also a few exceptions.
You can also withdraw your money from one IRA and contribute to another one within 60 days. Such transactions are completely tax-free, with no penalties. The money is sent directly to the owner of the individual account, who should contribute it within 60 days. After this period, you will have to pay taxes. People with such employer-sponsored plans as 401k, 403b, and 457b, choose this option most often. You can do a rollover once a year for one account.
Transfer (Trustee to Trustee)
The holder of an account transfers money directly from their current trustee to a new account. In this case, you don’t have to take funds or receipts, as money moves from one company to another. This method is tax-free and penalty-free. In addition, there are no restrictions regarding the amount of money.
Keep in mind that you can only transfer money between two pre-tax accounts or two post-tax accounts. For example, you can transfer your money from an SEP account to a Traditional account, since they are both pre-tax, but Roth accounts can be transferred only to Roth.
You can withdraw your money from an IRA at any time. However, a withdrawal before reaching the age of 59 ½ leads to a 10% Federal penalty. Indirect rollovers should be completed within 60 days, they are penalty-free and tax-free.
What Retirement Accounts Qualify
Individual investors can contribute their pre-tax income that will grow tax-deferred, with no dividend income or capital gains. Depending on the income and other factors, investors can contribute up to $6,500. Such contributions are tax-deductible. After withdrawal, the money is taxed. One can withdraw money at any time (penalty-free if over 59 ½ years old).
ROTH accounts allow people to contribute their post-tax income (up to $6,500). It grows on a tax-deferred basis. Such money is not taxed upon withdrawal because all ROTH accounts are post-tax. The federal penalty applies if an individual withdraws money from an account that was created less than 5 years ago or before they reach 59 ½ years.
Incentive Match Plan for Employees of Small Employers (SIMPLE)
This retirement plan can be created by self-employed people or employers. All contributions are tax-deductible. Individuals can only transfer money to SIMPLE IRAs or Traditional IRAs if accounts were established at least 2 years ago. Otherwise, the money will not be moved.
Employee Pension (SEP)
This plan can also be created by self-employed people or employers. Contributions are tax-deductible. An individual should own a business, be a President, CEO, or self-employed worker. Transfers are possible between SEP and Traditional accounts, as well as between two SEP accounts. This plan allows individuals to contribute 25% of their income or up to $55,000 per year.
This is an employer-sponsored plan. This is the most common type of retirement plans with a defined contribution. A rollover is possible only if you’re over 59 ½ years old or no longer work for your employer.
The difference between this plan and the previous one is that 403b is a plan for nonprofit organizations. A rollover is possible only if you’re over 59 ½ years old or no longer work for your employer.
If you’re an employee of a township, city, water district, park board, or another similar entity, your employer may offer a government deferred compensation plan. Such plans allow people to make pre-tax salary deferrals. The main advantage of this plan is that the 59 ½ rule doesn’t apply so you can withdraw your money without penalty at any age. However, the withdrawal will be subject to income taxation.
Tax-sheltered annuities are common in 403b plans. They allow an employee to contribute to a retirement plan from their income. Such contributions are deducted from the income and so not taxed until withdrawal. The employer can also make tax-free contributions, which allows employees to get additional tax-free money.
This is a plan for Federal government employees (both uniformed and civilian). A rollover is possible only if you’re over 59 ½ years old or no longer work for your employer. TSP uses their own forms for rollovers.