Using an IRA to save for retirement
The basics of individual retirement accounts
If you don’t work or don’t have an employer-sponsored retirement plan, an IRA is a good way to save for your retirement. Even if an individual has an employer plan, an IRA is a good way to save.
There are two types of IRAs, a “Traditional IRA” and a “Roth IRA.” Here are some differences you should be aware of.
- Your annual contribution may be tax deductible from your income for the year you make the contribution. (You have until the due date of the tax return without extension, generally April 15th, to make a contribution.)
- Investment earnings in your IRA are not taxed until you withdraw the money.
- You can contribute to an IRA no matter how much money you make, but the amount you may deduct from your tax return depends on your income, your filing status, and whether you or your spouse participate in an employer retirement plan.
- You must be under age 70½ at the end of the tax year and have earned income to contribute to a traditional IRA. If you don't work, you can make a contribution based on your spouse's earned income.
- Although Roth IRA contributions are not tax deductible, you won't pay taxes on the money you withdraw, as long as you meet certain requirements.
- You must meet certain income and tax-filing status requirements to make Roth IRA contributions.
- You can make contributions to a Roth IRA no matter how old you are (as long as you meet income requirements mentioned above and you or your spouse have earned income). Same contribution limits apply as with a Traditional IRA. These are combined limits for contributions to an IRA and a Roth IRA.
- There are no required minimum distributions while the owner is alive.
Whether you choose a Traditional or Roth IRA, you can open one at a range of financial institutions, such as banks, insurance companies, and brokerage firms.