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Types of IRA's
Home » Retirement » Types of IRAs » Types of IRA'sThere are basically three types of IRA’s: traditional deductible, traditional nondeductible and Roth IRA’s. Traditional IRA’s are tax deferred and have the strictest average gross income contribution amount. Roth IRA’s are tax free at the time of withdrawal. Tax free means you owe no tax when you withdraw. Under the types of IRA’s, there are varying options such as spousal IRA’s that can be tailored made to fit your retirement needs. Rollover IRA’s allow you to move money that has already been invested in another retirement plan into an IRA without paying taxes on it. Your balance can continue to accumulate tax-deferred until the time of withdrawal.
Traditional IRA: The traditional IRA allows you to invest regardless of your income. However, the amount of investment depends on your income. This amount is set the by the Federal government. Contributions may be fully deductible, partially deductible or nondeductible. You can deduct your contribution from your taxes if your income is less than the amount set by Congress and there is no available pension plan provided to you at work. If you are single and make $45,000, you can deduct your entire IRA contribution. If you make $55,000, then you may only deduct a portion of the amount on your taxes. If you are married and file jointly and make $65,000, you may deduct the entire amount. If you make $75,000 a year, only a portion of your IRA contribution may be deducted from your income tax. Depending on your income, in other words if you make a lot of money, you may only qualify for a nondeductible IRA.
Traditional Nondeductible IRA: If your income caps the amount set by Congress, then you can contribute to a nondeductible IRA. The money that you contribute is tax-deferred until time of withdrawal but your contributions are not deductible from your income tax. You do pay taxes at the time of withdrawal. You are required to withdraw beginning at the age of 70½.
Roth: The Roth IRA was introduced in 1998 to encourage more people to save and invest in their retirement. Most workers can qualify for the Roth. They can be appealing over the traditional IRA. The Roth is also different than the traditional IRA because it allows you to withdraw earnings tax free at any time after the age of 59½. Your account has to be open at least five years to withdraw tax free. The Roth IRA also has income limits that affect your contributions. It has no required withdrawals so you can continue to accumulate tax-free earnings. You may withdraw money early if you are using up to $10,000 toward the purchase of a first home. To contribute to a Roth IRA, your modified adjusted gross income must be less than the limit set by Congress. This contribution rate changed in 2005. You can make a full contribution with an adjusted gross income of $95,000, if you are single. If you are married you can make a full contribution ($4000), only if your adjusted gross income is a combined $150,000 or less. The rate of tax deduction lowers as your income level increases. There are also eligibility stipulations set on the Roth IRA. You can only contribute to a Roth if you are single and make less that $110,000. If you are married you can only contribute if you make less than $160,000. Roth IRA contributions are not tax deductible only tax free at the time of withdrawal. So the taxes you pay on the Roth are not tax-deferred like a traditional IRA.
Spousal IRA’s: You must work to contribute to an IRA but there are exceptions if you are married and one spouse does not work. Under this option, you have the ability to open a separate account for your spouse called a spousal IRA. The contribution limits are the same as for the Roth IRA and the traditional IRA ($4000). You must file a joint tax return to enjoy this option, and the account is in the spouse’s name. If you decide to open a spousal IRA and your spouse if now over 50, you can contribute an extra $1,000 annually to enjoy “catch-up” on benefits.
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