We live in a world that is filled with uncertainties, especially now, after we’ve been dealing with COVID-19 for quite some time. All of this has forced us to rethink some things and maybe reconsider some options we haven’t before.
Maybe, it wouldn’t hurt to get more serious about funding your retirement. There are a plethora of accounts at your disposal, however, according to some experts, an Individual Retirement Account (or IRA) is possibly one of the best alternatives.
If you haven’t heard of the IRA before, or you simply didn’t have enough time to get yourself familiar with it, don’t worry! That’s why this article is here, to tell you everything that needs to be known about it. Let’s check it out together!
IRA Rules Everybody Must Know
You Can Have More Than One IRA
For those of you who didn’t know, you can actually end up having one or even more IRA for various reasons. We are about to give you some examples:
- For instance, you already have a Roth IRA and then you decided to roll 401(k) into an ordinary IRA.
- Your AGI (Adjusted Gross Income) goes to the point where you are no longer eligible to contribute to the Roth IRA so that’s why you opted for the traditional one.
- You inherited it, however, you already have one
- You kept the Roth IRA and then opened a traditional one due to tax deductions.
It’s worth mentioning that you can have as many IRAs as possible, however, the total you can deposit in all of them is confined to the annual maximum. When it comes to it, for this year and the last year is 6,000 dollars, or 7,000 if you are over fifty years old.
IRA Contribution Limits
As we just mentioned, there is a limit on how much you can contribute to it. Speaking of IRA contribution limits, if you invest your money in a Roth IRA, the total amount of cash you can attribute to both of your accounts can’t surpass the annual limit. Furthermore, what you’ve earned during the year, should cover the IRA contribution.
For instance, if you earn 5,000 US dollars for the year, that is the maximum you can contribute to your IRA. If you are a parent or a grandparent, bear in mind that there isn’t any maximum age for contributing to it.
Moreover, if your kid or grandkid earns 2,000 US dollars from, for example, a summer job, he or she can put that cash into an IRA. Or you can do it instead. The only thing that matters is that he/she has earned enough cash to cover this contribution.
More IRA Rules Coming Your Way
Losses Can Be Tax-Deductible
One of the biggest advantages when it comes to it is the fact that you can postpone taxes on investment income and gains. Namely, you cannot utilize losses inside the IRA to even gains, however, if you carefully dispense the total balance from your IRA and the amount of money is less than the basis in your account, then yes, you can deduct that loss.
More importantly, the IRS (the Internal Revenue Service) enables people to deduct their losses regarding a traditional IRA, however, with some warnings. For example, if you have completely withdrawn all your money from all your traditional, SIMPLE, and SEP IRAs during one year, and the total amount of money is less than the total amount divided and after you have mixed the loss with other deductions, you can then subtract the amount that surpasses two percent of your AGI.
Your Contributions to a Roth IRA and Not Tax-Deductible
When it comes to the Roth IRA it doesn’t work the same way as a traditional IRA. So what does that mean? That means that you are supposed to pay tax in advance on your Roth contributions.
Furthermore, your contributions, as well as the account earnings are generally tax-free during the withdrawal process when you’re retired. This is actually a great fact because you will be able to save a bunch of money on taxes.
Just like with a traditional IRA, you can also make contributions without worrying about your age. The only thing that’s important is that you’ve earned some income, however, there aren’t any required distributions, which means that you can keep your cash in a Roth IRA for as long as you want to.
If you consider having a traditional IRA it is definitely recommendable to get yourself familiar with it before you decide anything, because as you can see there are a couple of little-known features that are worth remembering. Therefore, we hope that after reading this article, you will be able to make up your mind.