What is IRA?
IRA, which is short for Individual retirement account, gives you the opportunity to plan your retirement savings combined with quite a few tax benefits. There are two different types of Individual retirement accounts on the basis of the tax deductions for contributions. While tax is calculated for the funds that move to the Roth IRA account, there won’t be any tax deduction at the time of withdrawal. Tax is not applied for the funds transferred to the traditional IRA account, and will be applied on the funds at the time of withdrawal. Your eligibility to several tax benefits concerning the traditional IRA and the chances of qualifying to make a Roth IRA contribution depends upon your modified adjusted gross income (MAGI).
Relatively lower to the conditions in a 401(k), under the age of 50, a contribution limit of $5,500 is observed as of 2016 and 2017. An additional contribution of $1,000 will be allowed for citizens over the age of 50. It is possible to make contributions in both traditional and Roth IRA accounts, however one should make sure that the combined total contributions do not exceed $5,500 (or $6,500 for an age of 50 or older). An individual retirement account can be created and funded alongside a retirement plan funded by the employer. However, this factor might show an impact on the tax deductions that apply on traditional IRA contributions. Hence, it is important that you discuss the above option with your tax advisor prior to making a decision.
Withdrawal of funds from these accounts is just as stringent as other retirement accounts like 401(k) where you can expect a 10% penalty along with the normal taxes applied when the funds are withdrawn before the age of 59.5. The only way this penalty is found to be avoided is in the cases of death, certain eligible medical expenses, disability, expenses regarding qualified higher education, along with some other factors. Apart from this, it is not possible for one to avail a loan from the funds deposited in an individual retirement account.