Tax Time is Approaching, Should You Open a New IRA?

One of the challenges in opening an IRA is that there are so many versions of them.

Most people think of the two main types, the traditional IRA and the Roth IRA. But there are actually 11 types of IRAs, according to The Motley Fool.

For instance, there is the simple IRA, a matching plan offered by employers. Then there’s the SEP IRA, a version used by self-employed individuals.

Of course, the goal of all these IRAs is the same: They’re set up to help individuals save money for their retirements.

Roth and Traditional IRAs Feature One Big Difference

Most individuals will deal with either a traditional IRA or a Roth. There is a big difference between the two: When individuals invest money in a Roth IRA, that contribution is not tax-deductible. With a traditional IRA, the dollars individuals invest are tax-deductible.

However, when individuals take money out of a Roth IRA, they are not charged any taxes on it. That isn’t the case with a traditional IRA. When individuals take money out of this type of IRA, they are charged taxes on the withdrawal.

There is one big similarity between Roth and traditional IRAs, too. Individuals can invest up to $5,000 in both Roth and traditional IRAs in 2009 if they are under the age of 50. If they are 50 or older, individuals can invest up to $6,000 in both forms of IRAs.

Not Everyone can Invest in a Roth IRA

There is a catch to the Roth IRA, though. Those who want to invest in one have to meet certain income limits. Married taxpayers who file jointly can’t make a full contribution to a Roth IRA if they make any more than $166,000 a year. They can, however, make partial contributions if their annual income is from $166,001 to $176,000.

Single tax filers can make a full contribution to a Roth IRA if their annual income is below $105,000. They can make a partial contribution if their annual income is $105,001 to $120,000.

There are no income limits preventing individuals from investing in traditional IRAs.

There are Times When Early Withdrawals are OK

Most people have been told constantly that they can’t withdraw funds from their IRAs until they reach the age of 59-and-a-half. That’s largely true. But there are certain cases where people can withdraw IRA funds before reaching this target age.

People can take out money without any penalties for both traditional and Roth IRAs if they are buying a first home. With a Roth IRA, people can take out their contributions at any time without incurring taxes or penalties. They can’t, though, take out the earnings on these contributions without paying both taxes and a 10 percent penalty.

No One Needs a 401(k) Account and an IRA

Many individuals think they’ll be covered for retirement thanks to their 401(k) accounts and Social Security payments. However, that’s not necessarily true.

An IRA, of any kind, can serve as a cushion. This cushion might help individuals if an unexpected emergency comes up in their retirement years. Or, if they’re lucky, it might help them fund an unnecessary expense such as a long trip.