An Individual Retirement Account, or IRA, is an account that allows you to set aside money for retirement while getting a tax benefit. The two main types of IRAs are traditional IRAs and Roth IRAs. Each type has a different set of tax advantages, rules, and limits that may make them the right choice for your situation.
Roth IRA Details
- You pay taxes on the money you put in the account, but withdrawals are not taxed.
- You can withdraw your contributions (but not earnings) at any time without taxes or penalties.
- After you reach age 59-1/2, you can withdraw contributions and earnings without taxes.
- There are no age limits to open or contribute to a Roth IRA.
- There are no required distributions at any time.
- Eligibility and contribution amounts could be limited by your income.
Traditional IRA Details
- The money you put in the account may be tax deductible, but withdrawals in retirement are taxed.
- Contributions can be used to lower your taxable income.
- You must begin taking a minimum amount out of the account, called a required minimum distribution, at age 72.
- Distributions before age 59-1/2 trigger a 10 percent early withdrawal penalty in addition to being included as taxable income, with a few exceptions for specific circumstances.
IRA Contribution Limits
- The contribution limit is the maximum combined amount you may put into traditional and Roth IRAs.
- 2022 contributions cannot exceed $6,000. If you’re 50 or older, the limit is $7,000 to allow you to make catch-up contributions.
- You can’t contribute more than you earn.
IRA Income Limits
- Income is measured by your modified adjusted gross income (AGI).
- For Roth IRAs, high earners are able to contribute less, and if your income is over the limit you may not be able to contribute at all.