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The Ps and Qs of IRAs

Jul 16, 20207/16/2020

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Wealth & Giving

Saving for retirement is important. An IRA could be what you’re looking for. An IRA is a way to set aside money for retirement and also provides income tax advantages.

“IRA” stands for:

  • Individual Retirement Account1 – security stocks, bonds and mutual funds may be placed in this type of account; or
  • Individual Retirement Annuity – purchased annuities may be placed in this type of account.

Find Your Type

There are many types of IRAs, each with their own tax advantages, including traditional, Roth, Educational, SEP, and SIMPLE. Two of the most common are:

  • Traditional IRA – allows you to deduct eligible contributions.
    • To contribute to a traditional IRA, you (or you and your spouse if you file your taxes jointly) must have taxable compensation during the year you make contributions; and
    • You must be under age 70-1/2 by the end of the year in which you make contributions.
  • Roth IRA – The taxable income requirements are the same as for the traditional IRA, but the Roth does not allow you to deduct contributions you make. The Roth’s advantages come later: your earnings and gains may be completely tax-free when distributed.

IRA Requirements

There are certain requirements that apply to both traditional and Roth IRAs:

IRA Compensations

Taxable compensation that is eligible for an IRA includes:

  • Wages
  • Salaries
  • Tips
  • Commissions
  • Self employment income
  • Non-taxable combat pay
  • Alimony and separate maintenance

Taxable income that is not eligible for an IRA includes:

  • Earnings and profits from property
  • Interest and dividend income
  • Pension or annuity income
  • Deferred compensation
  • Income from certain partnerships

Contribute on Time

The deadline to contribute to an IRA is any time during the year, or up until April 15 the following year. But keep in mind, the sooner you open an IRA and begin making contributions, the longer your money will have to grow, potentially leaving you with a better end result.

Note: If you are over age 50, you may be able to make an additional catch-up contribution after making your maximum annual contribution. Refer to the IRS website or talk with your professional tax advisor to see if you’re eligible.

Convert if it’s Right

Converting a traditional IRA to a Roth IRA, simply put, is a way to pay income taxes now and avoid paying them later. As of Jan. 1, 2010, income restrictions on converting most pre-tax retirement accounts to Roth IRAs have been removed. Any tax incurred on a conversion is paid in the year of conversion.

To be eligible for a Roth IRA conversion, you must file as single or married filing jointly.

Plan What Works for You

WoodmenLife offers several options to help you save for retirement. Talk with your local WoodmenLife Representative to determine whether an IRA is right for you and your retirement goals.

 

  1. Investing in variable products involves risk, including the possible loss of principle. Early withdrawals may be subject to surrender charges and taxed as ordinary income, and, in addition, if taken prior to age 59½, an additional 10% federal income tax penalty may apply. Withdrawals reduce annuity contracts benefits and values. You should consider the investment objectives, risks, charges, and expenses of variable annuities and mutual funds before investing. Call Woodmen Financial Services, Inc. at 1-877-664-3332 for a copy of the prospectus, which contains this and other information about the annuity or mutual fund. You should read the prospectus carefully before investing.
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