What Is An Individual Retirement Account (IRA)?

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In terms of retirement plans, market offers a variety of options. For example, traditional 401 (K), Roth 401 (K), traditional IRA, Roth IRA. These choices are confusing. If you are one of them, this post will focus on explaining what an Individual Retirement Account (IRA) is.

Check out my post for details on 401 (K) plan ABCs of 401(K) Plan, ABCs Of 401(K) Plan 2 and Different Types of 401(K) Plan.

In the process of reading, you will encounter a lot of terms. Before you figure out these terms, they may confuse you a little. But the road to finance is not as complicated as we think. But the road to finance is not as complicated as we think.

What is the Traditional IRA ?

The full name of IRA is Individual Retirement Account. This is different from the 401(K) plan is another kind of individual pension account. Employees without employers, such as freelancers, can opt for an IRA individual pension plan. Anyone who has income may open an IRA account (whether or not you participate in other pension plans) with qualified financial institutions. You don’t have to pay tax when you deposit, but you have to pay personal income tax when you withdraw.

It is very necessary to open a Traditional IRA account. Employees who move from job hopping or dismissal or retire may transfer their 401K enterprise pension to individual IRA accounts.

What is the Roth IRA ?

Roth IRA, whose full name is Roth Individual Retirement Account, appeared in the taxpayer Relief Act of 1997 and was named after Senator William Roth. The main difference from Traditional IRA is that employees pay personal income tax when they deposit money into Roth IRA, but not when they withdraw money.

Traditional IRA vs Roth IRA

ComparingTraditional IRARoth IRA
Annual deposit limitIn 2020, the total amount of deposits in your Traditional IRA and Roth IRA accounts under the age of 50 is limited to $6,000. If you are 50 or older, the sum of deposits in both accounts is limited to $7000.In 2020, the total amount of deposits in your Traditional IRA and Roth IRA accounts under the age of 50 is limited to $6,000. If you are 50 or older, the sum of deposits in both accounts is limited to $7000.
QualificationTaxable income, under 70.5 years of age.Annual income above $139000 (2020) is not allowed.
Extraction ageAfter reaching the age of 59.5, you are eligible to take it out. After reaching the age of 70.5, you must withdraw some of it every year until it is empty, and you can no longer deposit it.There is no compulsory extraction age, and you can get it freely after reaching the age of 60.
FineOnly if you reach the age of 59.5, otherwise there will be an additional fine of 10%.No fine. It can be withdrawn after opening and deposit for 5 years. Once taken out, it can no longer be deposited.

Traditional or Roth IRA?

This choice depends on individual differences and involves a variety of circumstances and factors.

Choose Traditional IRA based on:

  • If you have a high income (including salary, stocks and other), traditional pension accounts can help you to avoid taxes.
  • You think the tax rate in the United States will be lower when you retire.
  • It is less likely to withdraw the pension in advance.

Choose Roth IRA based on:

  • From the establishment of the pension account to retirement, the income shows an increasing trend. The property in the account will also increase with your investment.
  • You think the tax rate in the United States will be higher when you retire.
  • It is more likely to withdraw the pension early.

401K, IRA, Roth IRA exist simultaneously?

If Traditional IRA exists simultaneously with 401 K, then the upper limit of total deposits in both accounts meets the requirement that Traditional IRA account deposit should not exceed $6000 ($7,000 if you’re over 50). And also meet the requirements of the upper limit of total deposits of two accounts not exceeding $19, 500 (2020).

Can I transfer money between 401K and two types of IRA accounts?

  • 401K accounts allow you to transfer money to your Traditional or Roth IRA.
  • Traditional or Roth IRA can’t transfer money to a 401K account.
  • A Traditional IRA can transfer money to a Roth IRA.
  • A Roth IRA cannot transfer money to a Traditional IRA.

Tools

If you want a more detailed calculation, you may try the free calculator on the internet. Such as Traditional IRA Calculator and Roth IRA Calculator.

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