Tax Myth #34:
All IRAs are the same.
We get this question quite often during tax season, “All IRAs are the same, right?”
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, though. 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.
Within the IRA family there’s a close cousin called 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.
The IRA family tree also includes the SIMPLE-IRA, which is another tool geared toward small-business owners and the self-employed. SIMPLE-IRA contributions go in tax-free and are taxed upon withdrawal. But like SEP-IRAs, SIMPLE IRAs allow savers to sock away more money each year for retirement. For 2017, the annual contribution limit is $12,500 if you’re under 50. If you’re 50 or older, you can put in up to $15,500. Employers are also required to match employee contributions to a certain degree, so if you work for a small business that offers this type of IRA, you’ll get some extra money on top of what you put in. If you’re self-employed and open a SIMPLE-IRA, you’ll get to contribute as both employer and employee.
All the abbreviation and acronyms can get rather confusing. Contact us and we’ll help you make the best decision for your business.
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.
Latest posts by David Conley (see all)
- Should you be paying “your fair share”:
We destroy another tax myth with facts- March 20, 2019
- Cliff notes of the new tax law:
Our cheat sheet guide to tax reform- March 16, 2019
- March madness-tax humor:
Bracket can be in the eye of the beholder- March 10, 2019