Many people ask – “what is an IRA?” So, we decided to provide some background on what an IRA is and how it works.
An IRA is an Individual Retirement Account or as the IRS coins it – an individual retirement arrangement. IRAs were established by the Tax Reform Act of 1986 and is a financial tax structure found in the United States.Traditional IRAs which most people are familiar with are held at a custodian institution such as a bank or a brokerage firm. Typical investments that are found in IRAs are certificates of deposit (CDs), stocks, mutual funds, and bonds.
Contributing or investing in a Traditional IRA is requires the account holder to meet eligibility requirements relative to their income, filing status, and any other retirement plans that may be held. One of the largest benefits of a Traditional IRA is the tax deductibility of contributions. Earnings that take place in the account such as capital gains, dividends, and interest are not subject to tax while still in an IRA. However, upon withdrawal, are subject to federal income tax at the person’s respective income tax rate.
Another type of IRA program is the Roth IRA. Roth IRAs are different from Traditional IRAs since contributions are never tax-deductible, but qualified withdrawals or distributions are free of tax. In addition, traditional IRAs have more restrictions on withdrawals as compared to Roth IRA. With both Traditional and Roth IRAs, transactions inside the account (including capital gains, dividends, and interest) incur no tax liability.
Here is a roundup of some of the features of a Traditional IRA:
Contributions are deductible, subject to conditions. When deducted – they are pre-tax, otherwise, they are on a post-tax basis. Withdrawals are taxed as ordinary income with the exception of any non-deducted principal investments made into the IRA.
Contribution Limits change every year or so – for the 2013 year the limits are: $5,500 per year for people aged 49 years or younger; $6.500 per year for people aged 50 years or older. These limits are total for both traditional IRA and Roth IRA contributions combined. In addition, a person is not allowed to contribute more than their annual earned income. For contributions to Roth IRAs, contribution limit is for a single person having an adjusted gross income of greater than $112,000 year, and for those filing jointly – an adjusted gross income of $178,000 per year. Note that contribution limits do not apply to conversions from a traditional IRA to a Roth IRA or a Self Directed IRA.
Distributions can begin at the age of 59½ , or earlier if owner becomes disabled. A forced distribution starts at age 70½ with a penalty of 50% of minimum distribution if not taken.
In addition – people need to be watchful not to withdraw funds early from an IRA plan, otherwise they’ll be subject to a 10% penalty plus taxes for distributions before age 59½. Some exceptions may apply, however, dealing with the IRS on this issue will not necessarily be easy.
Interestingly enough, we found out that you can withdraw up to $10,000 from your IRA for a home down payment, without any penalties. However, there are stipulations and you should discuss this with your investment professional before doing this.
Beneficiaries – when an IRA owner dies, the spouse as beneficiary can roll both accounts into one IRA account. Other beneficiaries (non-spousal) will be made to take minimum forced distributions annually based upon their life expectancy. In addition, beneficiaries will not have to pay an estate tax if the inheritance amounts is under the exemption amount.
Protection against creditors – IRA accounts are protected from bankruptcy up to one million dollars ($1,000,000). However, protection from creditors varies quite widely from state to state with some offering none to others offering full protection.
Another form of IRA is a self directed IRA which puts the investment decisions in the account holders hands and additional investment choices including real estate, precious metals such as gold coins and bullion, private companies, limited partnerships and the like. The self directed IRA can be start up as a new account or be converted from your preexisting IRA account. In terms of investing in gold through an IRA account – that is done through a self directed IRA which can easily be set up by qualified professionals.
To find out more about setting up your Self Directed Gold IRA – call us at 855-485-0088 (Toll-Free) to speak with a professional adviser. Just for calling – you will receive a Free Gold Investor’s Kit while limited supplies last.
Here are additional resources that cover different types of IRA investments:
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