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IRAs & Roth IRAs

April 10, 2024

Understanding IRAs & Roth IRAs

Both are quite different so let’s dive in.

IRA ~Individual Retirement Account~

  • Funded with pre-tax money: You may get the tax deduction now… See below
  • Money grows tax deferred
  • Taxed on withdrawals after age 59 ½
    • Withdrawals before you reach age 59 ½ are taxed as ordinary income and have an additional 10% tax penalty
  • Required minimum distributions upon reaching a certain age
    • SECURE Act 2.0 brought changes to RMDs
    • The RMD age is now 73, rising to age 75 in 2033
  • No income limits

 * You do not always qualify for a tax deduction. In order to receive the tax deduction now for your IRA contributions, it depends on whether you or your spouse are participating in an employer sponsored retirement plan and if so, it then depends on your MAGI (modified adjusted gross income) on whether or not you qualify for the deduction

 Roth IRAs

  • Funded with after-tax money: Therefore, no tax deduction now but…
  • Money grows tax free
  • Tax-free withdrawals
    • After age 59 ½ and after meeting the 5-year holding period requirement your withdrawals are tax free
  • NO RMDs during your lifetime
  • Your contributions can be withdrawn at any time
    • However, if you withdrawal your earnings before 59 ½ you are subject to ordinary income tax and an additional 10% tax penalty
  • Have income limits
    • High income earners may not be eligible to contribute directly to a Roth IRA
    • Based off your income and filing status you may only be eligible to do partial contributions, not the max contribution limit for the year, or you may be totally ineligible to directly contribute into a Roth IRA. This is where the backdoor Roth IRA comes into play
    • **Refer to one of my recent post about that strategy to learn more**

 The IRA and Roth IRA max contribution limit for 2024 is $7,000 or if 50+ $8,000.

  • Therefore, you are not allowed to make a $7,000 contribution into an IRA and make a $7,000 contribution to a Roth IRA.
  • The contribution limit is the total combined amount

 What about qualified distributions? This topic will be covered in a later post.


Disclosure:

Retirement Planning Solutions, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Retirement Planning Solutions, LLCC by the SEC nor does it indicate that Retirement Planning Solutions, LLC has attained a particular level of skill or ability. This material prepared by Retirement Planning Solutions, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Retirement Planning Solutions, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Retirement Planning Solutions, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Retirement Planning Solutions, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.