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Individual retirement account and its different types

IRA or individual retirement accounts are generally savings plans that have many restrictions. A key benefit of an IRA is that you postpone paying taxes on both earnings and savings growth until you withdraw the money. IRA accounts come in 3 types and each has its respective eligibility needs and tax implications.

1) Traditional IRA: its key characteristics are as follows,

• You will receive a tax deduction on the savings you provide to the account. It is this reduction that will reduce your taxable income, which means that you will not pay income taxes, especially on the amount that you establish separately in the traditional IRA.

• Your savings will grow but tax-deferred, indicating that you will not need to include capital gains, dividends, or interest from Individual Retirement Accounts in your annual income.

• When you withdraw the cash, the IRA distribution will be added to your taxable income. This will be taxed as ordinary income.

• For example, if the money is withdrawn before you turn 59½, there will be an additional 10 percent tax on the distribution made earlier.

• In fact, you should start withdrawing cash from the traditional IRA when you turn 70 1/2. And you must take the minimum necessary distribution each year or pay a 50% excise tax on the minimum necessary distribution amount

2) Non-deductible Traditional IRA: This is a traditional IRA. Contributions, however, are not tax deductible. Its features include,

• Savings are developed tax-deferred

• As you begin receiving distributions, one section of the distribution is in effect a tax-free return of your original non-deductible contribution, while the rest will be taxed as ordinary income.

Usually, people opt for the non-deductible IRA at a time when they are in a specific financial situation, especially when they are covered through a retirement plan through their employer, while their income is high to be eligible to deduct traditional IRA contributions and so are. They are not eligible to fund a Roth IRA as long as they wish to contribute additional retirement savings in the case of the tax-deferred account. A key difference between a traditional IRA and a non-deductible IRA is, in fact, the tax treatment related to the original contribution. Because it is a traditional IRA, the other rules that apply to a traditional IRA also apply to non-deductible IRAs.

The Roth IRA

The Roth IRA offers tax-free savings and distributions. Unlike the traditional IRA, you won’t get any deductions for contributions here. This makes it similar to non-deductible IRAs. However, there are notable differences in the way the distribution is taxed. Here are some key features of the Roth IRA,

• The required minimum distribution rules do not apply to the Roth IRA.

• You have income limitations

• In fact, you can contribute to the Roth IRA despite being covered through a retirement plan.

• Roth IRA distributions are absolutely tax free as long as you meet certain conditions.

• Savings are developed within a Roth IRA without the requirement to pay taxes on both growth and earnings.

These are the different types of IRAs. Study them thoroughly and reap the incalculable benefits.

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