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Individual Retirement Account and Its Different Types

IRA or Individual Retirement Accounts are generally savings plans that have many limitations. A main advantage of an IRA is actually that you defer paying taxes on both the earnings and also the growth of the savings until you withdraw the money. IRAs are of 3 types, each with their respective eligibility requirements and tax implications.

1) Traditional IRA – its main features are as follows,

• You will receive a tax deduction on the savings you provide to the account. It’s this reduction that will lower your taxable income, meaning you won’t pay income tax especially on the amount you set aside in the traditional IRA.

• Your savings will grow but tax-deferred this means you will not be required to include capital gains, dividends or interest from the Individual Retirement Accounts in your annual income.

• When withdrawing the cash, the distribution from the IRA will be included in the taxable income. This will be taxed as ordinary income

• For example, if the money is withdrawn before you turn 59 and a half, an additional 10 percent tax will be there on that distribution made earlier.

• In fact, you should start withdrawing money from a traditional IRA when you turn 70 and a half. And you must take the required minimum distribution each year or pay a 50% excise tax on the required minimum distribution amount

2) Non-deductible traditional IRA- This is a traditional IRA. However, the contributions are not tax deductible. Its features include,

• The savings develop tax deferred

• As you begin taking distributions, a portion of the distribution is actually a return that is tax-free from your non-deductible, original contribution while the remainder will be taxed as ordinary income.

Usually people opt for the non-deductible IRA at a time when he finds himself in a specific financial situation, especially when they are covered by a retirement plan through their employer while their income is high in being eligible to deduct the traditional IRA contributions as is. are not eligible for Roth IRA funding while they wish to contribute additional savings to retirement in the case of the tax-deferred account. A key difference between a traditional IRA and a non-deductible IRA is indeed the tax treatment related to the original contribution. Since it is a traditional IRA, the other rules that apply to a traditional IRA also apply to the non-deductible IRAs.

The Roth IRA

The Roth IRA offers tax-free savings as well as distributions. Unlike the traditional IRA, here you will not get any deduction for the contributions. This makes it similar to that of non-deductible IRAs. However, there are notable differences in the way in which the distribution is taxed. Below are some key features of the Roth IRA,

• The required minimum distribution rules do not apply to the Roth IRA

• It has income limits

• You can actually contribute to the Roth IRA despite being covered by a retirement plan

• Roth IRA distributions are absolutely tax-free as long as you meet certain conditions

• The savings develop within a Roth IRA without the requirement to pay any taxes on both the growth and the earnings.

These are the different types of IRAs. Study them thoroughly and reap indirect benefits.

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