IRA Basics 2024
Investing Financial Planning Taxes Retirement PlanningA 60-second read by The Baron Team: The purpose of this blog is to present some basic information about Individual Retirement Accounts (IRAs): Traditional and Roth IRAs and the differences between them. Inherited IRAs have different withdrawal guidelines, and these should be carefully reviewed. Contributions for tax-year 2024 can be made from January 1, 2024 – April 15, 2025.
What is an IRA? An IRA is an Individual Retirement Account.
Traditional IRA:
- Who is eligible? You or your spouse may be eligible to invest in an IRA if you have earned income.
- How much can you contribute? For 2024, you can contribute up to $7,000 per year based on your earned income (or $8,000 if you are over the age of 50).
- What are the tax implications? Investment income and growth is tax-deferred until you begin to make withdrawals.
- Are contributions tax-deductible? Yes (In most Cases).
- Are there withdrawal penalties? Yes, withdrawals made before age 59 ½ are subject to a 10% penalty (There are exceptions).
- What are the distribution rules? Withdrawal is mandatory starting at age 73 if you turn 73 between 2023-2032, and at age 75 for years 2033+.
Roth IRA:
- Who is eligible? Working taxpayers with gross income below $146,000 or $203,000 for married couples for the 2024 tax year (Phaseouts apply).
- How much can you contribute? For 2024, you can contribute up to $7,000 per year based on your earned income (or $8,000 if you are over the age of 50).
- What are the tax implications? With Roth IRAs you pay taxes upfront, so withdrawals made upon retirement are tax-free.
- Are contributions tax deductible? No
- Are there withdrawal penalties? None, if a qualified distribution.
- What are the distribution rules? No requirement to make withdrawals
What are the main differences between the two?
- Tax implications – with a Traditional IRA, you don’t pay taxes until you start making withdrawals, whereas with a Roth IRA you pay taxes upfront.
- Tax deductibility – Traditional IRA contributions are tax-deductible, while Roth IRA ones are not.
- Withdrawal penalty – there is a 10% penalty for making withdrawals before age 59 ½ for Traditional IRAs, whereas there is no penalty for early withdrawals with a Roth.
Why may a Roth IRA be a better option for Young Investors?
- A Roth IRA is generally best for someone who is in a lower tax-bracket (and typically younger professionals start out in a lower tax bracket). The idea is that you want to pay taxes in the lowest bracket possible.
As always, it is best to discuss your options with your personal financial advisor and/or tax professional who knows your specific circumstances.
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If you have any further questions, don’t hesitate to contact the Baron Financial Group Team.
Disclosure: This is a general communication being provided for informational purposes only. This material is not intended to be relied upon as a forecast, research, tax or investment advice. Please consult your financial planning and tax professional for personal advice.