Saving for retirement is important, and IRAs have played an increasingly essential role in Americans' retirement planning. That's one reason we've put together our IRA Center. We invite our readers to stop by and check out the wealth of information we've provided on these retirement instruments, from the basics to how to get invested.
The Internal Revenue Service has also put together its own definitive guide to IRAs: IRS Publication 590. The IRS broke up the 114-page document into two separate 60-page publications last year. If you have an in-depth question about IRAs, these publications have the encyclopedic answers that you'll want.
Most of us, though, don't need the depth that Internal Revenue Service publications provide. If all you want are the basics, you can use IRS Publication 590 and its offspring as backups and instead first read through the following summaries of what everyone should know about IRAs.
1. IRA contributions.
Anyone with earned income from sources like a job or a self-run business can contribute to an IRA. For 2015, the maximum annual contribution to all of your IRAs combined is $5,500, and those 50 or older can add an extra $1,000. Traditional IRAs don't have any income limits on participating, but your contributions may or may not be tax-deductible depending on your income and whether you have a retirement plan at work. Roth IRAs, on the other hand, have income limits above which you're forbidden from making contributions at all. Roth IRA income limits begin at $116,000 if you file taxes as a single individual.
You can also roll over money from a workplace retirement plan such as a 401(k) account into an IRA. These rollover IRAs used to be separate and distinct from other IRAs, but over the years, many of the distinctions have essentially disappeared, allowing you to combine rollover money with your own IRA contributions within the same account if you wish.
2. Traditional and Roth IRAs are very different animals.
Traditional and Roth IRAs share the IRA name, but they're different in many ways. Traditional IRAs often offer an up-front tax deduction, but you have to pay taxes when you withdraw money in retirement. Roth IRAs don't offer that up-front deduction, but their distributions are usually tax free once you retire. Other differences include the fact that while traditional IRAs require you to start taking mandatory distributions at age 70 1/2, Roth IRAs have no such provision. The rules governing distributions are also much different, with Roth IRAs providing more flexibility in accessing your money without penalty.
Whether a traditional or Roth IRA is better for you is a complex question, but it boils down to which one's tax benefits are worth more to you in your particular situation. Many investors choose a mixed approach that includes both types of IRAs in their broader portfolio.
3. Penalties often apply if you tap IRAs early, but there are exceptions.
One of the most important things about IRAs is that there is an incentive to keeping money in the account until retirement age. To encourage savers, the IRS puts a 10% early withdrawal penalty on the taxable portion of many distributions before age 59 1/2.
There are, however, several exceptions to the penalty. Using money for qualified higher education expenses, health insurance premiums while unemployed, or for a first-time home purchase are exempt from the penalty, as are distributions to help pay un-reimbursed medical expenses above a certain amount. Also, you're allowed to take what's known as a series of substantially equal payments to avoid penalties. Qualified military reservists also get special provisions allowing withdrawals in some cases.
4. Eventually, someone has to take money out of the IRA.
Taking money out of an IRA can be as complicated as putting it in. Traditional IRA holders must start taking required minimum distributions at age 70 1/2, which are determined by looking at life expectancy tables and pulling out the relevant fraction of your IRA assets corresponding to your expected lifespan.
If you don't get around to withdrawing all your IRA money before your death, the heirs you name to receive your IRA will have to. Surviving spouses can roll over money into their own IRAs, but others must use inherited IRAs and take minimum distributions. Different methods can allow an inherited IRA beneficiary either to take immediate lump sums or stretch distributions out over his or her lifetime, but one way or the other, the IRA will eventually come to an end.
5. You might get a tax credit for contributing to an IRA.
The Saver's Credit offers money back for contributing to an IRA if you meet the income requirements. Single filers with an annual income below $30,000 and joint filers with income up to $60,000 can qualify for the credit, which ranges from 10% to 50% of the first $2,000 you contribute. That means you can get as much as $1,000 back from the government -- or $2,000 for a joint-filing couple in which both spouses participate -- by using the credit.
This article definitely hasn't revealed everything there is to know about IRAs. Yet by providing the basics behind retirement accounts, it should give you a good starting point in establishing your own financial plan -- and point you in the right direction if you need some extra help from IRS Publication 590.
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