Retirement Planning Important IRA Terms to Know
Retirement planning can be confusing. Understanding the following terms can help you make informed decisions when planning for your future:
Individual Retirement Account (IRA)
An IRA, what the IRS officially calls an "Individual Retirement Arrangement," is a retirement account with tax advantages. There are two kinds of IRAs: Traditional, which for some people provides a tax deduction, and Roth. Regardless of the kind of IRA, your investment grows tax-free until you begin making withdrawals, usually after age 59 ½. If you take out money before then, you could incur a 10% penalty unless you meet specific requirements.
Modified Adjusted Gross Income (MAGI)
For purposes of IRA contribution deductions, MAGI is adjusted gross income as shown on an IRA owner’s income tax return without considering certain deductions and exclusions.
Deductible or Nondeductible Contributions
If you are not covered by your employer’s retirement plan, contributions to a Traditional IRA are tax-deductible. If you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a Traditional IRA depending on your income and filing status. Contributions to a Roth IRA are not deductible.
Required Minimum Distribution
To get Traditional IRA assets into the tax stream and to encourage individuals to use IRA dollars during their retirement years, the IRS dictates that Traditional IRA owners take distributions starting at age 72. These mandatory distributions are called Required Minimum Distributions (RMDs).
If you have any questions, please call one of our IRA experts at 800-821-5104.
- Al Kauffman, Certified IRA Professional, at ext. 2840
- Michelle Roxbury, Certified IRA Professional, at ext. 2876
Sources: Bankrate.com, Ascensus
Consult your tax advisor.