All IRAs Aren’t Created Equal

“Did you contribute to an IRA this year?”  It’s the question we’re asked at tax time every year.  If your answer is yes, irasare you sure you’re contributing to the right one?  Did you know that there are several different IRAs to choose from?  A conversation about remaining financially secure throughout retirement with someone already retired will quickly reveal that Social Security benefits aren’t enough.  Planning ahead to ensure that you have a steady income when you’re no longer working is paramount, and if you can defer the taxes until you start taking that income or if that income is tax-free… even better!

An Individual Retirement Account (IRA) isn’t an investment, rather a type of account in which contributions may be invested in securities such as stocks, bonds, money markets, and CDs to help you save for retirement.  Often the money distributed from an IRA in retirement is tax-free, making it a popular choice for retirement planning.  Each IRA has its own unique features, restrictions, and limitations, but knowing the basics of each, and if you’re eligible to contribute is a great start to determining which one is right for you.

Traditional IRA

A traditional IRA is a tax-deferred retirement savings account.  You pay taxes on your money only when you make withdrawals in retirement.  Deferring taxes means all of your dividends, interest payments, and capital gains can compound each year without being hindered by taxes – allowing an IRA to grow much faster than a taxable account.  Whether you qualify for a full or partial tax deduction depends mostly on your income and whether you have access to a work-related retirement account like a 401(k).  If you (or your spouse) earn taxable income and are under age 70 ½, you can contribute.  You will pay regular income taxes on the full amount of your withdrawals.  Withdrawals can be made anytime, however, if you are under age 59½ when you make the withdrawal, it is considered an early withdrawal.  Early withdrawals incur a 10% penalty in addition to paying regular income taxes.  While you can begin making qualified withdrawals from a traditional IRA at age 59½, you MUST start taking withdrawals that are known as “required minimum distributions” starting in the year you turn 70½.  The amount of the required distribution depends on how much you have saved in the account and your life expectancy, according to tables published by the IRS.

2016 Contribution Limit:  Up to $5,500 or $6,500 if you’re 50 years or older.


Roth IRA

A Roth IRA is a retirement savings account that allows your money to grow tax-free.  Roth IRA contributions are limited by income level, so not everyone is eligible to contribute.  You fund a Roth with after-tax dollars, meaning you’ve already paid taxes on the money you put into it.  Your money grows tax free, and when you withdraw at retirement, you pay no taxes.  You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, however, withdrawing any investment earnings before age 59 ½ will incur a penalty unless it’s for a qualifying reason.  If you converted money from a traditional IRA into a Roth IRA, you can’t take it out penalty-free until at least five years after the conversion.  Unlike the traditional IRA, there are no required minimum distributions when you turn 70½, you can continue to let your money grow without touching it.  You can also continue contributing to a Roth IRA, regardless of age as long as you are still earning employment income.

2016 Contribution Limit:  Up to $5,500 or $6,500 if you’re 50 years or older.

2016 Income Limits:  For single filers, phase-out starts at $117,000; ineligible at $132,000.  For married filers, phase-out starts at $184,000; ineligible at $194,000.


Simplified Employee Pension (SEP) IRA

A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners.  Contributions, which are tax-deductible for the business or individual, go into a traditional IRA held in the employee’s name.  Employees of the business cannot contribute, only the employer does.  Like a traditional IRA, the money in a SEP IRA is not taxable until withdrawal.

2016 Contribution Limit:  Up to 25% of income or $53,000, whichever is less.


Simple IRA

A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is another type of traditional IRA for small businesses and self-employed individuals.  Similar to a SEP IRA, contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement.  Unlike the SEP, a SIMPLE IRA allows employees to make contributions.  The employer is required to make a contribution on the employee’s behalf – either a dollar-for-dollar match of up to 3% of salary or a flat 2% of pay, regardless of whether the employee contributes to the account.

2016 Contribution Limit:  In addition to what your employer contributes, you can contribute up to $12,500 or $15,500 if you’re 50 years or older.


Spousal IRA

A Spousal IRA is either a traditional or Roth IRA funded by a married taxpayer in the name of his or her non-working spouse.  The couple must be married and file a joint tax return in the year of the contribution.  The working spouse must have compensation or earned income of at least the amount they contribute to both IRAs.

2016 Contribution Limit:  Up to $5,500 or $6,500 if you’re 50 years or older.


Rollover IRA

A Rollover IRA is a type of traditional IRA set up by an individual to receive a distribution from a qualified retirement plan such as a 401k.  Distributions transferred to a rollover IRA are not subject to any contribution limits.  Whether you have $3,000 or $300,000 in your qualified retirement plan, you can transfer it all into your rollover IRA at once since it is considered a rollover and not a contribution.  The distribution from your qualified retirement plan can also be transferred into a qualified retirement plan available through a new employer.  Commingling of rollover IRA money with other IRA or qualified retirement plan money is permitted, and has no impact on the ability to transfer those IRAs to a new employer’s retirement plan.


Inherited IRA

An Inherited IRA is either a traditional or a Roth IRA acquired by the non-spousal beneficiary of a deceased IRA owner.  Special rules apply to an inherited IRA.  A tax deduction is not allowed for contributions to this IRA, the assets inside the inherited IRA cannot be rolled over into another IRA, and the proceeds must be distributed and taxed within a specific period as established by the IRS.

About Oakstone Law, PL

Oakstone Law PL was founded by Bob Kleinknecht. A member of the Florida Family Trust Company Subcommittee, the Estate Tax & Trust Planning (ETTP) Committee and the Real Property, Probate & Trust Law (RPPTL) Section of the Florida Bar, Kleinknecht has 15 years’ experience.

Prior to founding Oakstone law, he spent more than eight years serving as a personal, in-house estate, tax and charitable planning attorney for a Forbes 400 family in New York and Florida. Before that, he was an estate planning and estate settlement attorney with prominent firms in Boston and Washington, D.C. after beginning his career with a boutique firm in Naples, Florida.

Licensed in Florida and Massachusetts, Kleinknecht has developed a practice model that eliminates billing by the hour and offers a streamlined, customized client process supported by technology, security and a personal approach.

For more information on Oakstone Law, click here. To get in touch with us, click here to send us an email, or call 239-206-3454.

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Oakstone Law
1415 Panther Lane, Suite 439
Naples, Florida 34109
Tel: 239.206.3454