A Guide to Your IRA

I’d like to walk through with you a basic guide to your IRA. So traditional IRAs became available back in 1974 so we’re coming up close to 50 years for that. And then meanwhile Roth IRAs weren’t started until 1997. So we haven’t had those around quite as long. But the benefits of an IRA include a tax deduction for contributions that you make into a traditional IRA and there’s no tax while you’re earning that interest. But on the traditional IRA, obviously you’re going to have taxes owed when you go to withdrawal those funds. Meanwhile, a Roth IRA provides you tax-free growth along with future tax-free distributions. But you don’t get the upfront tax deduction like you would on a traditional IRA. There’s going to be limits on your contributions. So it’s in 2022, that’s $6K, but meanwhile when you’re age 50 and over there’s make-up contributions they say of $1K. So you could contribute up to $7K in 2022. And this applies to both traditional and Roth IRAs. And you can file or contribute up to the tax filing deadline for the previous year for contributions. Different eligibility requirements, you must have earned income. However, you can set up a spousal IRA if you’re working, your spouse isn’t working, you can make contributions on their behalf. And you might be eligible to contribute to both a 401K and an IRA, traditional or Roth. But you need to be below certain income amounts. And that changes year by year. Along with making contributions, those income limitations may come into play as far as for traditional IRA and Roth IRA. So you want to double check that information. As far as traditional versus Roth, traditional they way I look at it is you’re essentially saving the tax on the seed, but then paying tax on the harvest versus Roth IRA, you’re paying tax on the seed and then there’s no taxes on the harvest. So the old adage is, for a traditional IRA is that you’re potentially in a higher tax bracket today then where you’re going to be in the future. So why not take that tax deduction now in a traditional IRA because you’re going to be in a much lower tax situation upon retirement. That may or may not be the case for you. That’s something a lot of times people look at and see well if I’m earning this income and spending this level of income today, perhaps in retirement I want to be at a similar level. And so you may end up in the same tax bracket potentially. So again, a lot of different factors that go into this. And if you haven’t really evaluated a traditional IRA versus Roth IRA and what makes sense for you, we encourage you to give us a call here at Centennial Wealth Advisory.