
Individual Retirement Accounts (IRAs)
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Individual Retirement Accounts (IRAs)
The individual retirement account (IRA) is a personal account for people who are employed. Depending on the type of IRA you have, you can choose to pay taxes in the future on the withdrawals or pay the taxes now on the contributions. Both offer some benefits to you depending on your situation.
Things To Know
- You can set up an IRA at several types of institutions.
- You can get a tax deduction on your contributions to an IRA.
- The Roth IRA lets you withdraw tax-free after age 59½, although you don’t get the tax deduction when you contribute to it.
You can set up an IRA at almost any bank, credit union, brokerage, insurance company, or mutual fund. There are a wide variety of investment options to choose from, and your earnings are untaxed until they are paid out of the plan.
How much you can deposit
Tax law lets you deposit up to $7,000 for 2025 to your IRA—$14,000 for married people who file a joint tax return. If you are not covered by a qualified retirement plan at work—or, if covered, you fall below a certain income level—your IRA contribution may be fully or partially tax-deductible. The law also allows taxpayers age 50 and above to make an extra "catch-up" contribution of $1,000; this catch-up contribution amount is indexed for inflation starting in 2024. These figures are totals for all traditional and Roth IRA accounts combined.
Taking your money out
As with employer-sponsored tax-deferred plans such as the 401(k), there are caveats. Any money you withdraw before age 59½ is taxed at your ordinary rate; plus, there may be a 10 percent penalty tax. Traditional IRAs require you to take your money out at age 73. One bonus: if you were not permitted to take your IRA contributions as a tax deduction while you were working, you don’t have to pay taxes on them when you take your money out (your accrued earnings are still subject to taxes, however).
The Roth IRA
The Roth IRA is a variation that lets you withdraw principal and earnings tax-free after age 59½, as long as the contributions have been in the plan at least five years. Unlike traditional IRAs, Roth IRAs don’t require you to take distributions, and you can keep contributing to them as long as you like as long as you have earned income. Also unlike the traditional IRA, Roth IRA contributions are made with after-tax dollars—no deduction is allowed for Roth contributions. However, when you take withdrawals (as long as you obey the rules), you don’t pay taxes on any of them, including the earnings that accrue.