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If not, you need to get your ducks in a row and start saving NOW! We offer a Traditional and Roth IRA (Individual Retirement Arrangement or commonly referred to as Individual Retirement Account). We also offer SEP IRA’s; please consult your tax professional for details about this type of IRA.
What’s the difference?
Traditional: Defers taxes on earnings until they are withdrawn. Certain contributions MAY be tax deductible for the tax year for which they are made.
Simplified Explanation: You pay the tax before you contribute the funds, so you are taxed when you distribute it. It defers taxes on earnings, so you do not pay taxes until you withdraw. Withdrawals of pre-tax contributions and earnings are taxed if they are properly withdrawn at or after age 59 1/2.
Roth: Can make only non-deductible contributions. Distributions are generally tax and penalty free after 5 year holding period and age 59 ½ and a few other acceptable distribution reasons.
Simplified Explanation: Tax is already paid before contribution of funds, so you do not pay taxes upon distribution (on certain distributions). There are some income eligibility requirements for contributions, so it’s best to check with your tax professional about those specific requirements.
Terms to Know:
- Deposit is a contribution.
- Distribution is a withdrawal.
- Eligible compensation is income a person earns from working, W-2 income, wages, salaries, tips, bonuses, nontaxable combat pay.
Can I make a contribution?
Traditional: You need to have eligible compensation to make a regular contribution to a Traditional IRA, see your tax professional for additional requirements.
Roth: You must have eligible compensation and MAGI (Modified Adjusted Gross Income) that is not above certain limitations.
What amount can I contribute?
Traditional: You may be able to contribute any amount up to 100% of eligible compensation or the amount set forth in contribution chart. For 2023, the contribution limit is $6,500.00 with a catch-up contribution of $1,000.00 (for those 50 and older). There are some additional considerations for this…depending on the amount contributed to some other retirement vehicles.
Roth: Same as Traditional IRA provided MAGI limits do not exceed limitations.
Can I deduct my contributions?
Traditional: Yes, check with your tax professional for guidelines regarding your situation
Do I pay taxes on distributions?
What years can I make contributions for?
You can make contributions for 2023 and until Tax Day of 2024. You can also make “a prior year” contributions for 2022 until Tax Day of 2023, although contributions for tax year 2022 were at a maximum of $6000.00.
What is a prior year contribution?
This is a contribution you can make in the current year, up until Tax Day, for the prior year. For example: On March 31, 2023 you decide you want to make a contribution for last year, 2022. You will sign documents stating the year of your contribution. You have until Tax Day this year to make this contribution.
What does age have to do with IRA contributions?
With the Secure Act, there is no longer an age limits to contribute to a Traditional or Roth IRA.
Contribution limit considerations: Customer must earn enough eligible compensation for the tax year to support their IRA contribution, Example: Let’s say you earn $2,000 at your job. Even though the 2023 contribution limit is $6,500, you can only make a maximum of $2,000 to your IRA.
What happens at the bank when I want to open an IRA?
We understand all the rules around IRA’s can be intimidating for customers. Let’s walk through a typical conversation about opening an IRA at First Citizens Bank.
Our bankers will greet you with a friendly hello! They will ask you some questions and compile documents to identify you such as your drivers license, address, phone number, and social security number. So be prepared with these items when you come to the bank!
Your banker will ask which type of IRA you are opening: Traditional IRA or ROTH IRA. Typically, your tax professional will be sure you know which type to open. A very simple explanation of these IRA’s:
Traditional: Deductible contributions (pre-tax), taxed upon distribution.
Roth: Non-deductible contributions, distributions may be tax and penalty free if certain conditions are met.
The banker will then gather some information about the amount of your contribution and whether it is for the current year or a prior year. It is very important to know which year you will be contributing for as you will sign documents stating the year of contribution.
You will choose from one of three types of CD’s for your IRA. First Citizens Bank has 3 CD options. Our 12 month and 18 month option are variable, time open CD’s. What does that mean? This means the interest rate can fluctuate with the market trends. This rate could change daily, or it may stay stable. The time open portion, means that you can contribute to this CD at any time. Our 36 month option is a fixed rate. This means the interest rate that you open the account with does not change for 36 months. This CD also does not have a time open feature. All three options can be changed at maturity to a different CD option.
Next, the banker will ask you about your choice of beneficiary. This is a person or persons who will receive your IRA assets if you should pass away. You can name a primary beneficiary(s) as well as contingent beneficiary(s). What is the difference? Your primary choices will receive your IRA funds into a Beneficiary or Inherited IRA. If your all of primary choices have pre-deceased you, then the IRA funds will go to your contingent beneficiary in the same way. If you do not name a beneficiary your IRA funds will go to your estate. There are many tax saving benefits to naming a beneficiary for your IRA! Please have as much identifying information with you for any beneficiaries, such as name, date of birth, address, SSN, and your relationship to this person(s).
Your banker will then complete the necessary paperwork and explain it to you. You will then sign your documents and be given a copy of them for your records. Don’t be intimidated by these documents, our bankers are knowledgeable about IRA’s and will help you through this process!
Let us help get your ducks in a row for your retirement. Contact us today!
*Please consult your tax professional for advice.