Retirement Accounts

What are Individual Retirement Accounts?

          Individual Retirement Accounts (IRAs) come in a variety of shapes and sizes, and it’s essential to know which one best meets your needs in order to be financially secure in your retirement. Unlike savings accounts, IRAs provide long-term savings/investment accounts that individuals with earned income can use to save for the future and enjoy certain tax advantages.

So what are all the available IRAs? Traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs are the many types of IRAs. Each has distinct qualifying criteria, taxes, and withdrawal requirements.

Which IRA Suits You?

          Now that we understand what IRAs are and why they exist, let’s examine how their characteristics vary.  

Accounts

Benefits

Contribution (per year)

Required Minimum Distribution at 72


Traditional IRA

Income set aside lowers your current taxable income. Withdrawals in retirement are taxed at ordinary income tax rates.

For 2023,

Under Age 50: $6,500

Above Age 50: $7,500


Yes


Roth IRA

Contributions made with taxable income, but gains are exempt from further taxation once the account holder reaches 59.5.

For 2023,

Under Age 50: $6,500

Above Age 50: $7,500


No



SEP IRA

Same as Traditional IRA, but setup by self-employed individuals like independent contractors, and small-business owners.

For 2023, the maximum allowed contribution is $66,000


Yes


Simple IRA

Similar to a Traditional IRA, but allows employee contributions and requires employer contributions as well.

For 2023,

Under Age 50: $15,500

Above Age 50: $19,000


Yes

Required Minimum Distribution – At age 72, holders of traditional IRAs are required to begin taking RMDs based on the size of their accounts and their life expectancy. Failure to comply may result in a tax penalty equal to 50% of the amount of the required distribution.

          The Traditional IRA and the Roth IRA are the two most popular IRAs. How to judge which account is best depends on the individual’s tax bracket when contributions are made versus when withdrawals are taken. Roth IRAs are ideal for those who anticipate withdrawing funds in a higher tax bracket than when they initially contributed. In contrast, with a traditional IRA, the individual anticipates withdrawals will be made when they are in the same or a lower tax bracket as when they made the contributions.  The graph below illustrates the typical employee’s career lifecycle with their tax rate.  For most employees, as they work further into their career they earn more.  This increase in earnings means they pay more income tax.  When your current income tax rate exceeds your anticipated retirement rate, it’s time to move from a ROTH IRA to a Traditional, SEP, or SIMPLE IRA.

Deducting IRA Contributions

Another important aspect is to determine if your IRA Contributions are tax-deductible. Only contributions to non-ROTH IRAs are deductible.  In order to determine how much, if any of your contributions are deductible, you’ll need to know your Modified Adjusted Gross Income (MAGI) and if you (or your spouse if you are married) are eligible for a retirement plan at work.

To determine the ability to deduct contributions will be based on your modified adjusted gross income (MAGI). Here is a handy chart to determine the deductibility of your contributions.  Start by selecting if you (or your spouse) are eligible for a retirement plan at work:

Eligible for Retirement
NOT Eligible for Retirement
IRA_Eligible
IRA_NOTEligible

Last but not least, it is important to be aware of the maximum Roth IRA contribution limits. Here are the numbers:

Filing Status

MAGI

Contribution

Singlehead of household, or married filing separately and you did not live with your spouse at any time during the year

< $138,000

$138,000 but < $153,000

$153,000

Up to the Limit

Reduced Amount

Zero

Married filling separately and you live with your spouse at any time during the year

< $10,000

> $10,000

Reduced Amount

Zero


Married filing jointly or qualifying widow(er)

< $218,000

$218,000 but < $228,000

$228,000

Up to the Limit

Reduced Amount

Zero

What Else Should I Know About IRAs?

          First, when should you make withdrawals from you IRA? After age 59 1/2 is the best time to withdraw from an IRA. In addition to taxes, you will incur a 10% early withdrawal penalty if you withdraw before age 59 1/2. There are exceptions to this penalty for medical expenses, disabilities, and other extraordinary life circumstances. In general, the longer you can wait before withdrawing funds, the more time they have to grow (which you can read more about here).

What if I have a 401k? 401(k) plans have higher contribution limits (except for the SEP), but anyone can open an IRA, regardless of whether their employer offers a 401(k) plan. The majority of 401(k) plans offer a limited selection of mutual funds and exchange-traded funds (ETFs), whereas a typical IRA provides a broader selection of funds, stocks, and other securities. However, employers typically match contributions, therefore if your company has a 401k match program, it is encouraged to contribute up to the match limit.

Lastly, just remember IRAs are intended for long-term retirement savings. If you withdraw money before retirement, you defeat the purpose by reducing your retirement assets. Consequently, money held in an IRA cannot typically be withdrawn before age 59 1/2 without incurring a hefty 10% penalty (in addition to normal taxes owed).

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All investors are unique.  The above characteristics are examples, but may not reflect your particular investor demographics or situation.  An advisor with Edgar Investment Management, LLC will assist you with finding the best type of account for you. 

Investment advisory services are offered through Edgar Investment Management, LLC, an investment advisor registered with the State of Texas. Edgar Investment Management, LLC only offers investment advisory services where it is appropriately registered or exempt from registration and only after clients have entered into an investment advisory agreement confirming the terms of engagement and have been provided a copy of the firm’s ADV Part 2A brochure document.

The content found on this website is developed from sources we believe provide accurate information and is for educational purposes only. The information on this website is not intended as tax or legal advice. Everyone’s tax and legal situation is different, so please consult trusted and knowledgeable legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided on this website are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Material and information found on this website is not intended as an offer or solicitation for the sale or purchase of any specific security, mutual fund, ETF, bond, or investment strategy.  

Investing is risky!  No guarantee as to performance of any investment is implied by this website.  Make sure you have evaluated your options and spoken with trained professionals before you implement any investment strategy.  Past performance is not indicative of future results.  

Please be advised that Edgar Investment Management, LLC is a financial advisory firm specializing in investment management and financial planning services. We do not offer or provide any CPA-related services, including tax preparation, tax planning, or other accounting services. If you require assistance with tax-related matters, we recommend consulting a qualified CPA or tax professional who can provide specialized advice tailored to your individual needs.

Edgar Investment Management, LLC is not a Public Accounting firm.

 

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