What is an IRA?
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The Ubiquity IRAs are coming! Our IRA is another great way to save for retirement while gaining tax advantages.
An IRA is an investment account, so instead of an ordinary savings account earning 0.5-2% annual interest, your contributions can be invested in mutual funds, bonds, or index funds. These accounts are tax-shelters, so you don’t pay taxes on gains, dividends, or interest while your money is growing in the account. IRAs are a great way to save for the future if your employer doesn’t offer a retirement plan (i.e. 401(k), 403b, etc). In some cases, you can use an IRA to maximize your savings alongside your existing 401(k) plan. If you’re curious about weighing the benefits of a 401(k) vs an IRA, click here.
In 2023, the contribution limit for traditional and roth IRAs, the two most common and accessible IRAs, is $6,500. If you’re age 50 or older, you can save up to an additional $1,000 as a catch-up contribution. In addition to depositing annual contributions, IRA savers may fund their IRA account with benefits rolled over from their former employer’s retirement plan or another IRA.
Unlike a 401(k) plan that has to be opened by your employer, anyone with earned income (or who has a spouse with earned income) can open an IRA. In this case, the term “earned income” means having earnings that are claimed for tax purposes.
A traditional IRA is a retirement savings vehicle that allows you to defer taxes on the earnings and growth of your savings until you actually need it in retirement. If you try to dip into these funds before age 59 ½, the IRS will impose a 10% early distribution tax penalty in addition to taxing the amount of the withdrawal at your current income tax rate. A traditional IRA has a required minimum distribution (RMD) starting at age 72.
In a traditional IRA plan, most savers can deduct their contributions from their income in the year they make contributions. You don’t pay taxes on interest or gains while your savings grow. When it is time to withdraw funds for retirement, you’ll pay taxes at your income tax rate. Typically, your income will be less in retirement than while you are working, reducing the amount of taxes you pay overall.
A Roth IRA is a retirement savings vehicle that, if you meet certain requirements, allows you to withdraw your savings and distributions tax-free. Unlike a traditional IRA, contributions to your retirement plan are not tax deductible, but the earnings on your Roth contributions still grow tax-free.
Because you’ve already paid taxes on your contributions, you can withdraw them in retirement without tax or penalty. Once you reach age 59 ½ and have had your IRA for at least five years, you can take distributions, including earnings, without paying federal taxes. If you withdraw your funds early, you’ll be subject to a 10% penalty.
Roth IRAs do not have a minimum distribution requirement, so you’re not forced to take distributions out of your account when you reach a certain age. There’s also no age limit to making contributions. This allows older folks who continue to work into their golden years an opportunity to save in a tax-advantaged vehicle–and potentially pass money to their heirs.
The eligibility conditions, and the amounts you can contribute to a Roth IRA are dependent on your tax filing status and modified adjusted gross income (Modified AGI). Below are 2023 Roth IRA income-based contribution limits:
Roth and traditional IRA contribution limits (age 49 and younger)
$6,500 (must have earned income)
Roth and traditional IRA contribution limits (age 50 and older)
Additional $1,000
IRA modified adjusted gross income limit for partial deductibility: Single
$73,000 – $83,000
IRA modified adjusted gross income limit for partial deductibility: Married, filing jointly
$116,000 – $136,000
IRA modified adjusted gross income limit for partial deductibility: Married, filing separately
$0 – $10,000
IRA modified adjusted gross income limit for partial deductibility: Non-active participant spouse
$218,000 – $228,000
Roth IRA modified adjusted gross income phase-out ranges: Single
$138,000 – $153,000
Roth IRA modified adjusted gross income phase-out ranges: Married, filing jointly
$218,000 – $228,000
Roth IRA modified adjusted gross income phase-out ranges: Married, filing separately
$0 – $10,000
SIMPLE IRA contribution limits (age 49 and younger)
$15,000
SIMPLE IRA contribution limits (age 50 and older)
$19,000
Need a quick guide to understanding the differences between traditional and Roth IRAs?
The experts at Ubiquity Retirement + Savings have your back.
Traditional IRA
Roth IRA
Income Limit
None. As long as you earn income, you can contribute
$140,000 for single filers
(the rules get complicated for the married/head of households)
Contribution Limit
$6,000 a year ($7,000 if you’re 50 or older)
$6,000 a year ($7,000 if you’re 50 or older)
Age Limit
None, as long as you’re still working
None, as long as you’re still working
Age Requirement for Penalty-Free Withdrawals
59 ½ (unless you qualify for one of the IRS’s exceptions)
59 ½ (unless you qualify for one of the IRS’s exceptions), and your account is at least 5 years old
Required Minimum Distribution
Yes, beginning at age 72
If you are the original owner of the IRA, none.
Taxes on Growth
You don’t pay taxes on capital gains, dividends, or interest while your money’s growing (before you start withdrawals).
You don’t pay taxes on capital gains, dividends, or interest while your money’s growing (before you start withdrawals).
Taxes on Contributions
It depends on your coverage in a workplace retirement plan and your Modified AGI.
Yes, contributions are made on an after-tax basis
Taxes on Withdrawals
Yes
No; qualified distributions can be withdrawn tax-free
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San Francisco, CA 94104
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© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 300
San Francisco, CA 94104
Support: 855.401.4357