New Investor Blog Series from BFG – IRA Basics

Baron Financial Group’s New Investor Blog Series will consist of monthly blog posts that provide general information on a range of investment topics. The series aims to provide new investors with basic investment information.

*This blog post is the first in the series*

 A 60-second read by the Baron Team:  What is an IRA? An IRA is an Individual Retirement Account. There are two types of IRAs – Traditional and Roth. 

Traditional IRA:

• Who is eligible? Anyone can invest in an IRA if they are under the age of 70 ½ and are still working
• How much can you contribute? For 2019, you can contribute up to $6,000 per year based on your earned income (or $7,000 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 70 ½

Roth IRA:

• Who is eligible? Working taxpayers with gross income below $137,00  or $203,000 for married couples for 2019 tax year (Phaseouts apply)
• How much can you contribute? For 2019, you can contribute up to $6,000 per year based on your earned income (or $7,000 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 by age 70 ½

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
• Contribution age-limit – Unlike a traditional IRA, contributions to a Roth IRA can be made beyond age 70 ½.
• 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. To read more on the topic, click here for our “What is the Best IRA for a Young Investor?” blog.

As always, it is best to discuss your options with your financial advisor and/or tax professional who knows your specific circumstance.

If you have any further questions, don’t hesitate to contact the Baron Financial Group Team.