An Individual Retirement Account (IRA) is a type of savings account that offers tax advantages to individuals to encourage them towards retirement savings. There are two main types of IRAs – Traditional IRA and Roth IRA.
In the traditional IRA, you make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement. In Roth IRA, you make contributions with money you’ve already paid taxes on (after-tax), and your money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.
1. Who is eligible to open an IRA?
An IRA can be opened by anyone who has earned income. The amount of money that you can contribute to your IRA is the lesser of your annual earned income or the annual limit set by the IRS.
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2. What is the current maximum contribution limit for an IRA?
For the year 2020 and 2021, the maximum contribution limit is $6,000 if you’re under age 50. If you’re age 50 or older, the IRS allows a catch-up contribution worth an additional $1,000, making your total contribution limit $7,000.
3. Can I open both a Traditional IRA and a Roth IRA?
Yes, you can open both types of IRAs at the same time, but your total contribution to both the accounts combined can’t exceed the annual contribution limit set by the IRS.
4. When can I withdraw my money from an IRA without penalty?
You can withdraw your money from a traditional IRA without penalties when you reach 59.5 years old. If you withdraw earlier than that, you may incur a 10% penalty on top of the applicable taxes. For a Roth IRA, in most cases you can withdraw your contributions (but not any profit made on them) at any time without penalty.
5. Are there required minimum distributions (RMDs) for an IRA?
For traditional IRAs, RMDs start when you reach age 72. Roth IRAs do not have RMDs during the life of the original owner. The RMD amount is determined by the IRS, and it’s based on your age and the account balance at the end of the previous year.