The second is a Roth IRA which, while not permitting a tax-deductible contribution, does allow for a tax-free distribution of both contributions and earnings under certain circumstances. Before you make a decision on which one is right for your situation, you may want to talk to your financial professional.
A traditional individual retirement account allows your investment earnings to grow tax deferred until withdrawn, typically at retirement. You may also have a traditional IRA even if you participate in a qualified pension, profit-sharing, or other retirement plan.
However, if you are an active participant in a qualified plan, your entire contribution may not be tax deductible, depending on your income and tax filing status. Traditional IRAs offer two distinct advantages in terms of taxes: potential deductibility of contributions and current tax deferral on investment earnings.
That is, the total of your contributions to all IRAs must not exceed the appropriate limit. In addition, you can open an IRA or make contributions to an existing IRA as late as the deadline for filing a tax return for that year. Taxpayers who are not participants in an employer-sponsored retirement plan can deduct their IRA contributions up to the specified limit. Taxpayers who participate in employer-sponsored retirement plans may not be able to deduct all of their contributions to a traditional IRA depending on their income.
As you evaluate the potential benefits of an IRA, consider the advantage of tax deferral. IRAs can also come in handy when you're about to leave jobs and need to move your retirement plan assets. If your former employer permits you to withdraw your retirement money, you can move these funds to an IRA account and postpone the payment or move them from your former employer's qualified retirement plan into a rollover IRA and avoid owing current income tax on the distribution.
If you choose to physically receive part or all of your money and do not replace the entire amount within 60 days, you may be subject to an early withdrawal penalty tax and income taxes on the amount you don't rollover to an IRA or other plan. Some exceptions may apply. A great advantage of taking only the required minimum distribution is that the balance continues to compound tax deferred.
Decisions about asset allocation, beneficiaries and withdrawals belong solely to the spouse who owns the IRA. Married couples must file a joint tax return to be eligible. Couples who file their taxes separately are not eligible for spousal IRA contributions. Total marital income is considered for Roth IRA contribution limits.
There is no age limit on spousal IRA contributions. As long as at least one member of the couple is earning income, you can contribute to your IRA no matter how old you are. Was this article helpful? Share your feedback. Send feedback to the editorial team. Rate this Article. Thank You for your feedback! Something went wrong. Please try again later. Best Ofs. More from. By Kat Tretina Contributor. Information provided on Forbes Advisor is for educational purposes only.
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