More than 43% of Washington workers, or about 1.2 million people, do not have access to a retirement plan at work. While the number is staggering, all such people can still secure their future by simply opening an Individual Retirement Account (IRA). If you are also trying to plan your retirement with an IRA, you can call a CPA in Seattle, WA, and get professional help.
A CPA will diligently review your income and expenses and recommend the right IRA to help you achieve your retirement goals.
Exploring different types of IRAs
Earlier, there used to be only one type of individual retirement account. However, there are now three different types of IRAs, each with different features. These IRAs enable you to create a significant fund towards your retirement on a tax-favored basis. Here are the features of each IRA:
Traditional IRA
- The deductions made towards a traditional IRA can be deductible and nondeductible.
- If you do not have an employer-sponsored retirement plan, you can make a tax-deductible contribution of $5,500 towards a traditional IRA. The limit is $6,500 for individuals over 50.
- If your employer provides a retirement plan, you can make a nondeductible contribution,
- Your earnings are tax-deferred.
- You cannot withdraw IRA funds before the age of 59½. If you do so, you’ll have to pay the taxes and a 10% penalty.
Roth IRA
- Your contribution to a Roth IRA is taxed upfront.
- The contribution limit is the same as that of a traditional IRA for the Roth IRA, i.e., $5,500 and $6,500 if you’re over 50.
- Earnings in a Roth IRA are also tax-deferred but can become tax-free if withdrawn after five years from the first contribution and upon reaching the age of 59½.
- You are allowed to contribute to a Roth IRA only if your earnings are less than $161,000.
- You can continue to contribute even after the age of 70½.
SEP and SIMPLE IRA
- Simplified employee pension (SEP) or savings incentive match plan for employees (SIMPLE) IRA is for small businesses intending to lower the administrative cost of retirement plans.
- Contributions to SEP and SIMPLE are not tied to traditional and Roth IRA limits, which is 25% of an employee’s earnings or $69,000, whichever is lesser.
- SEP and SIMPLE IRA are tax-deductible.
Final takeaway
Individual Retirement Accounts (IRAs) are excellent for those who want to put aside a significant retirement fund. You can also choose to roll over to an IRA from your 401(k) and transfer your assets to an IRA from an old retirement account sponsored by your employer. This can allow you to save on current taxes.
