Learn more about traditional and Roth IRAs
A Traditional IRA is an account that holds investments you’ve made (for example, CDs, mutual funds, or stocks) to help pay for your retirement. If you have earned income, you can contribute up to age 70½ and your contributions may be tax deductible. The major benefit is that the government doesn’t tax the interest you earn until you withdraw it, normally when you retire. This can help your account compound faster to give you more money at retirement.
Traditional IRAs are good investments for money you don’t need right away and can afford to invest for a period of time. If you need it before you reach age 59½ (unless it’s to buy your first home or pay education expenses) you’ll pay both a penalty fee and taxes on your withdrawal.
A second type of IRA is called a Roth IRA. These IRAs offer an advantage for seniors — you may contribute to it at any age as long as you have earned income and meet certain income limitations.
When you open this type of IRA, you make after-tax contributions, but the money you withdraw after retirement may be free from federal taxes.
For 2013, the maximum you can contribute to all of your Traditional and Roth IRAs is the smaller of:
Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 ½ or meets other requirements. Both may be subject to a 10% Federal tax penalty if distributions are taken prior to age 59½.
To understand the differences between Traditional and Roth IRAs, and to set up an IRA, it’s important to work with a banker, a financial advisor, or a retirement specialist.
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