How Do IRA’s Work?

Answers to common questions you may have.

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By Denise Logeland

If you’re saving for retirement, you’ve already probably learned that every type of savings vehicle comes with its own set of tax rules. One advantage of putting your savings into an individual retirement account (IRA) is that you get the flexibility to choose the set of tax rules that will apply.

That’s because there are two main types of IRAs, the traditional and the Roth, explains Karen Birr, manager of Advanced and Retirement Consulting at Thrivent.

With a traditional IRA, if neither you nor your spouse participates in an employer plan, your contributions are tax-deductible. If either of you do participate in an employer plan, your contribution would be tax-deductible as long as your income is below certain income thresholds. So you get a tax benefit up front. Later, when you withdraw money in retirement, you’ll pay tax on it. But at that stage of life, you might be in a lower tax bracket than you are now—another potential benefit.

With a Roth IRA, you get no tax deduction up front, so each dollar you contribute is one that you’ve paid tax on. The tax benefit comes later in life. When you withdraw money from a Roth IRA, if it’s a qualified distribution, all of it comes out tax-free—both the dollars you contributed and your earnings on those dollars.

Can anyone have an IRA?

If you or your spouse (if you file a joint tax return) have earned income either as an employee or as a self-employed individual, you can contribute to an IRA. The maximum allowed contribution for 2019 and 2020 is $6,000, or $7,000 if you’re 50 or older. For tax year 2020 and forward, there is no age restriction to contribute to a Traditional IRA.*

How do the dollars in an IRA grow?

The money in an IRA can be invested in the same ways that money can be invested generally. It can be in stocks, bonds, mutual funds, and so on. However, past performance is not necessarily indicative of future results.

How long do I have to wait to withdraw money?
You can withdraw your money at any time. However, taxes and penalties will depend on if you’re taking money from a traditional** or Roth IRA, and if you meet an IRS penalty exception.