With all the retirement terms surrounding nest eggs, savings accounts and tax deferment, it can be a challenge to know everything about all your financial investments and retirement income planning options. One area of confusion is the individual retirement account, or the IRA.
IRA’s and 401(k)s are both qualified retirement plans. A 401(k) is a plan that some employers make available to their employees. On the other hand, an individual may open an IRA on his or her own. There are two main types of IRAs: traditional and Roth IRA. This article focuses on the traditional IRA, which has different features than a Roth IRA. IRAs are often used by those who have maxed out their employer contribution plans. They can be opened in conjunction with other retirement income vehicles, but many individuals confuse their value and purpose. While you might have some basic understanding of your IRA, here are 5 things you may not know:
1. There Are Contribution Caps
A good way to build up your retirement assets, is to contribute a portion of your earnings throughout your entire working life. This will give you more time to create a nest egg with the potential to last as long as you live. However, there are contribution caps for IRAs. Each year, the IRS creates these IRA limits, which means you may not be able to contribute as much as you want.
2. Contributions Must Be Cash
When you make annual contributions to your IRA, it must be done in cash. This is true in all cases except for rollover contributions.
3. Losses May Be Tax Deductible
There are several tax advantages to IRAs, such as deferral of taxes on the growth of the account, or its annual earnings. However, upon distribution, you will need to pay any taxes due on the amount you receive from the account. On the other hand, IRA investments that lose value can be potentially tax deductible. They cannot offset the gains and taxes you must pay, but you can deduct losses in certain circumstances.
4. There Are Required Distributions
Once you reach 70 ½ years old, you are required to start taking distributions from your IRA. This is similarly true for other qualified retirement plans, like your 401(k). How much you are required to take out will depend on a specific formula, but you could incur tax penalties if you do not start to take distributions by this age.
5. An Annuity Can Be Used In An IRA
An annuity is an insurance product that can be used for an IRA. However, there are no additional tax deferral benefits than what are inherent in an annuity. In addition, the future benefits of an annuity are based on the financial strength and claims paying ability of the issuing insurance company.
Call today and we’ll put you in touch with one of our licensed insurance professionals at J.D. Mellberg to find the best retirement income strategy for your needs. Be more confident you will not outlive your money with lifetime** payments from the right annuity option.
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