FAQs About Individual Retirement Accounts (IRAs)

An individual retirement account, or IRA, is an account where you can put aside money from your annual income to save for retirement. It is a government pension plan available at any financial institution such as a bank, mutual fund company or brokerage firm. Below, we’ve compiled answers to commonly asked questions about IRAs.

What are the different kinds of IRAs?

There are four primary types of IRAs: the traditional IRA, Roth IRA, SEP (Simplified Employee Pension) IRA and SIMPLE (Savings Incentive Match Plan for Employees) IRA. The two most popular IRAs are the traditional IRA and the Roth IRA.

How does a traditional IRA work?

With the traditional IRA, you can take up to a maximum of $5,500 every year from your income before tax and place it into the account. The amount is tax-deductible and can be saved in several different forms, including CDs, stocks, bonds and cash. The savings are not taxed as long as they remain in the account. Income tax must be paid only when the savings are withdrawn from the account.

Withdrawals before age 59½ incur a 10 percent penalty fee in addition to the regular income tax on the amount. After age 70½, you must begin withdrawing a minimum yearly amount from your IRA, known as a “required minimum distribution.”

How does a Roth IRA work?

The Roth IRA is best for those who fall under its income cap. You must have an income under $194,000 if married and filing jointly or under $132,000 if single to create a Roth IRA. Like the traditional IRA, the Roth IRA savings grow untaxed in the account. However, with the Roth IRA, money is being placed aside from your income after tax, so you do not have to pay income tax on withdrawals from a Roth IRA.

Furthermore, you can withdraw money from a Roth IRA at any time without penalty if the money comes from your contributions to the account and not from your investment earnings. You are not required to withdraw a minimum annual amount starting at age 70½; you can take money out of the Roth IRA much later if you wish.

What are SEP and SIMPLE IRAs?

The SEP and SIMPLE IRAs are designated for the self-employed. The SEP and SIMPLE IRAs work like traditional IRAs, but they have a higher contribution limit. The difference between SEP and SIMPLE IRAs is that SIMPLE IRAs allow employees to contribute and require the employer to match each employee contribution.

How do IRAs differ from other retirement plans?

IRAs’ main difference from other retirement plans such as the 401(k) is that they are not set up through a company. Because the IRA is established individually, it is not dependent on a company’s profits or losses, and its funds will not fluctuate with its respective company’s. Thus, there is a lot more security in choosing an IRA for a retirement plan.

If you have questions about your retirement planning or want to apply for an IRA, get in touch with Citizens National Bank today. Our expert team members can walk you through all the steps.