In the world of financial planning, saving for retirement can seem complex and confusing. But the right information and advice can put you on track towards building a retirement savings. In this series of articles, we will examine some different aspects of Individual Retirement Accounts (IRAs). What is an IRA? An Individual Retirement Account (IRA) is a personal, tax-deferred account the IRS created in 1974 as a way to encourage retirement savings. The two most common types of IRAs are Traditional and Roth. Understanding IRAs by Hills Bank Trust and Wealth Management Group | Part 1 in a 4 Part Series
A Traditional IRA allows individuals to contribute pre-tax income, thus lowering their taxable income. The earnings grow tax-deferred. Income taxes are not assessed until distributions are taken (see distributions below).
A Roth IRA , unlike a Traditional IRA, is funded with after-tax contributions. These contributions are not tax deductible. However, the earnings are not subject to income taxes and distributions may be made in retirement without incurring any income taxes on the withdrawals.
In simple terms, Roth IRA contributions are taxed before the funds go into the account; Traditional IRA contributions are taxed when the funds come out.
Funding and Income Limitations The IRS allows a taxpayer to contribute up to $5,500 ($6,500 if you are over age 50) of earned income per year to an IRA or Roth IRA. The IRS imposes limits on how much a taxpayer may contribute to an IRA or ROTH IRA based upon their modified adjusted gross income (MAGI). For 2018, to be eligible for a full contribution, the MAGI thresholds are:
Filing Status
Traditional IRA $62,000 or less $101,000 or less
ROTH IRA
Single
$120,000 or less $189,000 or less
Married Filing Joint
If a taxpayer’s 2018 MAGI exceed the above amounts, they may still be eligible to make a partial contribution.
Distributions For distributions from a Traditional IRA, timing is everything. If you take a distribution before age 59 ½, you will be taxed and penalized (unless certain circumstances apply). Once you reach 70 ½ years old though, the IRS requires the account owner to begin taking minimum distributions. These are called Required Minimum Distributions (RMDs). An RMD is calculated for each IRA account by dividing the prior December 31st market value by a life expectancy factor published by the IRS. Failure to take your RMD may result in a penalty equal to 50% of the RMD! In contrast, Roth IRAs do not require withdrawals until after the death of the account owner. Consolidate your accounts If you have multiple retirement and investment accounts, consolidating your assets with Hills Bank can make it easier for you to keep track of your money and manage your investments. With Hills Bank serving as your investment manager, you’ll be able to see the big picture and guard against unwanted investment overlap. Reviewing your portfolio’s asset allocation and periodically rebalancing your portfolio will be a lot easier. What’s more, it only takes one call to Hills Bank when you have questions or concerns about your money.
To talk to a Hills Bank Trust and Wealth Management Officer about your retirement, call 1-800-899-8858 or visit us at https://www.HillsBank.com/RetirementPlanning
Investment products are not a deposit, not FDIC insured, not insured by any federal governmental agency, carry no bank guarantee, and may go down in value.
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