No matter what you may have heard about IRAs, it’s time to set the record straight.
We hear a lot about the importance of saving for retirement, and an individual retirement account is a good way to help you achieve your goals. But how much do you really know about IRAs and how they work? Here are a few misconceptions that might trip you up if you don’t know the truth.
1. All IRAs are the same
IRAs actually come in a number of varieties. The two most common types are the traditional IRA and Roth IRA. With a traditional IRA, the money you contribute typically goes in tax-free, but once you reach retirement, your withdrawals are taxed as ordinary income. Roth IRAs work the opposite way, in that contributions are made with after-tax dollars, but withdrawals can be made tax-free in retirement. The annual contribution limit for both traditional and Roth IRAs in 2017 is $5,500 if you’re under 50, or $6,500 if you’re 50 or older.
Not everyone can open a Roth IRA, however. If you earn more than $133,000 as a single tax filer this year or more than $196,000 as a married couple filing jointly, you won’t be eligible to contribute to a Roth.
Then there’s the SEP IRA, which is an option if you’re self-employed or run a small business. The money you contribute to a SEP IRA goes in pre-tax; withdrawals are taxed in retirement, but the annual limit is much higher than that of a traditional IRA. For 2017, you can contribute up to a quarter of your income, for a maximum of $54,000.
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