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IRAs and the Retirement Game

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IRAs are very common retirement investment accounts that help manage the impact of taxes on your investments.

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In the game of investing for retirement, the first door you’ll have to open is marked IRA. IRAs are very common retirement investment accounts that help manage the impact of taxes on your investments. Because taxes can take a big chunk out of your savings, IRAs come in handy. We look behind the doors of the two most common IRA types, so you won’t be surprised when it’s your turn to walk through.

Traditional IRA
o When do you pay income tax on the money? You aren’t taxed now, but you will be taxed on the original contribution and on any earnings when you withdraw.
o What’s the upside? Any money you put in reduces your tax bill at the end of every year. Depending on your tax situation, that could come in handy.
o What’s the downside? If you’re in a higher tax bracket when you start withdrawing, you end up paying even more in taxes in the long run.
o When can I start withdrawing money? After 59 ½ and before 70 ½.
o What if I need the money earlier… If you need the cash and withdraw it before 59 ½, you’ll pay a 10 percent penalty, plus income tax.
o …and have a good reason? You’re allowed to withdraw money from either type of IRA without penalty if you meet certain exceptions, such as becoming disabled, paying for college or buying a first home. For the full list of exceptions, go to 1.usa.gov/1gwEb59.
o Do I make too much money to have one? There are no income limits for traditional IRAs.
Roth IRA
o When do you pay income tax on the money? You pay the tax on your income before contributing to the IRA.

o What’s the upside? When you start withdrawing, you won’t have to pay taxes on those withdrawals, or their earnings (as long as you meet a few requirements).
This makes ROTHs popular for younger people, because it’s likely that you make less income now and are in a lower tax bracket than you will be when you’re older. So you’ll pay less tax in the long run.
o What’s the downside? If you’re making more money now than you expect to when you retire, then a ROTH might increase your total taxes.

o When can I start withdrawing money? After 59 ½ and before 70 ½, as long as you’ve had the account for at least five years.

o What if I need the money earlier… If you need the cash and withdraw it before 59 ½, you’ll pay a 10 percent penalty.
o …and have a good reason? You’re allowed to withdraw money from either type of IRA without penalty if you meet certain exceptions, such as becoming disabled, paying for college or buying a first home. For the full list of exceptions, go to 1.usa.gov/1gwEb59.
o Do I make too much money to have one? Only if you make more than $125,000 (single) or $182,000 (married and filing jointly).
IRAs are a great way to start preparing for your future. Even if you think it’s too late to start or that you don’t make enough, once you hit 59 ½, you’ll be happy you started saving as soon as possible.

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