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IRA Options

Date Published: Aug 30, 2022

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So, what is an IRA? You have probably heard it mentioned before in the world of finance and investing, but what exactly is it?

An IRA, or Individual Retirement Agreement, is a type of savings plan with tax advantages that you can open to help save money and invest in the long term, say for retirement. Anyone with an earned income can open an IRA and add funds to it and when you open an IRA you have pretty good range of financial products to invest it in.

One way you can open an IRA is right here through Wildfire, but another aspect of IRAs to take note of is that there isn’t just one type. Each one having a little bit different rules in terms of eligibility, taxations, withdrawals, and others. Which IRA you choose can also be influenced by various factors like your income.

So let’s take a look into each type of IRA that Wildfire offers to help you open the IRA that will benefit you the most.

Roth IRA

One of the two more popular IRA options is the Roth IRA. With a Roth IRA, contributions are made with funds that have already been taxed. On the big plus side though, contributions are not taxed later on in life when you retire and withdraw them!

However, the intended purpose of an IRA is to help fund your retirement. So, while you can withdraw funds at any time, there may be tax penalties for early withdrawals if you do not meet any of the stated tax penalty exceptions.

Another valuable feature of a Roth IRA is that you can move other types of retirement savings into your Roth IRA. Savings like Roth 401(k) and non-Roth retirement plans can be rolled over into your Roth IRA, as long as you are eligible to take a distribution from your employer’s plan.

In order to be eligible to open a Roth IRA, all you need to do is have earned an income within or below the current year’s income range. Any contribution limits depend on your tax-filing status.

Traditional IRA

The other of the two most popular IRA options is the Traditional IRA. Contributions made to traditional IRAs are tax-deductible. Let’s say you put $1,000 into an IRA, your taxable income for the year decreases by that amount.

Now, earnings grow tax-deferred on investments within your IRA as you add savings to it. So, your IRA balance will continue to grow as you contribute until you are ready to withdraw the money. This is in part due to the fact that when you withdraw money from a Traditional IRA, the withdrawals are taxed at your ordinary income tax rate.

Like with a Roth IRA, the assets in a Traditional IRA are meant to be used during retirement years. The money in your Traditional IRA is always available to you, whether you keep it or move it to another IRA or retirement plan. Keep in mind though, when you remove funds from your IRA all previously deductible contributions and earnings you made are taxable and subject to penalty taxes if you are below the age of 59 and a half.

With a Traditional IRA, you are required to take out a minimum amount for the year you reach the age of 72, and for every year after that. To be eligible to open a Traditional IRA, you just have to be earning income.

SEP IRA

SEP stands for Simplified Employee Pension and while it is a type of traditional IRA, it is set up and supported for employees, by an employer. Self-employed individuals like freelancers and small business owners can open SEP IRAs as well. Earnings in a SEP IRA grow tax-free, but withdrawals when you reach retirement are taxed.

Basically, SEP IRAs follow the same tax rules for withdrawals that Traditional IRAs follow.

Business owners can withdraw their contributions on behalf of employees, but employees cannot add to their accounts and the IRS taxes funds they take out as income. Annual contribution limits also tend to be higher than other tax-favored retirement accounts and must meet certain requirements to be eligible.

Coverdell Education Savings

This type of IRA is designed to provide you with a way to save and invest funds for your child’s education. Contributions to a Coverdell Education Savings (ESA) and earnings are tax free when they are withdrawn to pay for qualified education expenses.

Qualified education expenses being those that are required for your child to be enrolled in and/or attend an eligible educational institution. It includes costs such as tuition, books, fees, supplies, and equipment.

One cool thing about Coverdell ESAs is that anyone from family relatives to friends can contribute to a child’s ESA. However, each child may only receive contributions totaling $2,000 a year, so be sure to avoid excess contributions.

Another valuable aspect is that funds can be rolled-over from an ESA to a new or already existing one, but the funds must benefit the same child or an eligible member of the child’s family. If you rollover funds, it will not affect the annual contribution limit. To add, you can also change the child or beneficiary that funds are being sent to, as long as the new beneficiary is under the age of 30 and is an eligible member of the family.

Lastly, there is one more limitation that comes with an ESA outside of the $2,000 contribution per year limit. Your contribution amount may be limited if your modified adjusted gross income is between $95,000 and $110,000 if you’re single or between $190,000 and $220,000 if you are married. Above these levels, you are unable to contribute.

Open Your IRA Today

Ready to start your own IRA and prepare for your future? All you have to is get in touch with us! We will help you understand the options so you can decide the plan that is best for you and your family, and get you started on the right track to help make sure you are set financially for your future. Give us a call or stop into one of our branch locations today!