IRA or Individual Retirement Accounts are generally saving plans that have lots of restrictions. A key benefit of an IRA indeed is that you postpone paying taxes both on the earnings as well as the growth of the savings till you withdraw the money. IRAs are of 3 types with each having its respective eligibility needs and tax implications.
1) Traditional IRA- its key features are as follows,
• You will receive a tax deduction on the savings which you provide to the account. It is this reduction that will cut down your taxable income which means you will not pay income tax especially on the amount that you set separately in the traditional IRA
• Your savings will grow but tax deferred that indicates you will not require including capital gains, dividends or interest from the Individual Retirement Accounts in your yearly income
• While withdrawing the cash, the IRA’s distribution will be added in the taxable income. This will be taxed as an ordinary income
• For instance, if the money is withdrawn prior to you turning 59 years and a half, an additional 10 percent tax will be there on that distribution made earlier
• In fact, you should begin to withdraw cash from traditional IRA when you turn 70 and a half years old. And you should take the needed minimum distribution every year or pay 50% excise tax on the needed minimum distribution amount
2) Non deductible traditional IRA- This is a traditional IRA. The contributions, however is not tax-deductible. Its features include,
• The savings develop tax deferred
• While you begin taking distributions, a section of the distribution indeed is a return that is tax-free of your nondeductible, original contribution while the remaining will be taxed like ordinary income
Usually people opt for the nondeductible IRA at a time when he finds himself in a specific financial situation, especially when they are covered via a retirement plan via their employer while their income is high in being eligible in deducting the traditional IRA contributions as well as are not eligible for funding a Roth IRA while they wish in contributing additional savings towards retirement in case of the tax-deferred account. A key difference amid a traditional IRA and a nondeductible IRA is indeed the tax treatment related to the original contribution. Because it is a traditional IRA, the other rules which apply to a traditional IRA also applies to the nondeductible IRAs.
The Roth IRA
The Roth IRA offers tax-free savings as well as distributions. As opposed to the traditional IRA, here you will not get any deduction for the contributions. This makes it similar to that of the nondeductible IRAs. Yet there are noteworthy differences in the manner in which the distribution is taxed. Below are some key features of the Roth IRA,
• The needed minimum distribution rules is not applicable to the Roth IRA
• It has income limitations
• You can actually contribute to the Roth IRA despite being covered via a retirement plan
• Distributions from Roth IRA are absolutely tax-free as far as you cater certain conditions
• The savings develop inside of a Roth IRA devoid of the requirement of paying any taxes both on the growth and the earnings
These are the different types of IRAs. Study them thoroughly and avail untold benefits.