IRAs: What You Need to Know


As you’re going through tax documents for the past year, you may be wondering how you could benefit by making more investments in the future. One way is to take advantage of an IRA. Here’s what you need to know to get started…

What it is:

An IRA is an Individual Retirement Account — an account you can access after you retire, while taking advantage of certain tax benefits. It’s a good supplement to your 401(k) or similar work plan.

Two types of accounts

IRAs have two main forms: the traditional IRA, and the Roth IRA. Here’s how they compare:

  Traditional IRA* Roth IRA*

Primary requirements for making contributions

·Must be earning taxable compensation

· Must be under the age of 70 ½

·Must be earning taxable compensation of at least $5,500 in 2016 (unchanged from 2015)

Annual contribution limit (for the year 2016) Your income, or $5,500 – whichever is less.

Your income, or $5,500 – whichever is less, as long as your Modified Adjusted Gross Income does exceed a certain amount.

MAGI Limits are:
$132,00 for singles/heads of household

$194,000 for marrieds filing jointly

$10,000 for marrieds filing separately
Tax advantage Contributions are made pre-tax, so you’re not taxed on what you’re putting in. Instead, you pay taxes on the amounts you withdraw later.

Your ability to deduct contributions depends on whether you or your spouse also have a 401(k) plan through work.

Contributions are post-tax, so earnings grow tax-free. You do not pay taxes when you make your later withdrawals (assuming you meet key requirements).
Spouse can contribute to your IRA, even if he or she is not earning an income? Yes Yes
Those age 50 and older can make extra, “catch-up” contributions Yes Yes
Penalties for early withdrawal You may incur a 10% fee if you’re under age 59 ½ when you take money out — unless you meet specific criteria.  
Required withdrawals? Yes, after age 70 ½, you must withdraw a minimum amount each year.  No

*Talk to your tax professional or a Horizon Bank financial advisor for details on tax implications for you and your circumstances.

Which one is right for you?
It depends on your circumstances, and your long-term financial goals. Both offer a wealth of benefits, depending on your needs. Talking with a professional will help you make the best decision for you.

Contact us for more information.

To get up to speed on all the ins and outs of your IRA options, contact us today. Our financial advisors will be happy to help!