When it comes to retirement there are a lot of investment options out there and a lot of places that offer these options. It can be hard to know where to start and whom to trust with your hard-earned money. After all, you have plans for the future, right? When the time comes, you want to be able to do all the things you’ve dreamed of without any unwanted surprises. So, the first step is understanding how investments like IRAs work, what the different IRA types are, and how taxes work for each of them. Get the answers now.
How Does an IRA Work?
An IRA is a retirement savings account that individuals can open on their own, offering tax-free asset growth. They are typically opened at a brokerage firm, a bank, or a credit union and can be funded with pre-tax or after-tax dollars, depending on the type of IRA.
With an IRA, you have complete control over how your money is invested (versus a 401k). You can choose from a wide variety of stocks, bonds, mutual funds, ETFs, commodities, and other investments. You cannot, however, invest in life insurance plans or collectibles.
Types of IRAs
There are two main types of IRAs: traditional and Roth. With a traditional IRA, contributions are tax-deductible, but withdrawals in retirement are taxed as ordinary income. With a Roth IRA, contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.
IRA Contribution Limits and Tax Rules
In 2023, the maximum contribution limit for a traditional or Roth IRA is increasing to $6,500 per year ($7,500 if you’re age 50 or older).
Withdrawals before age 59 ½ usually come with a 10% IRS penalty. There are exceptional circumstances called hardship distributions where the 10% penalty may be waived, but these are extremely rare. In such allowable circumstances, the withdrawal will be limited to the amount needed for the “immediate and heavy financial need.”
Withdrawals for a traditional IRA will also incur federal and state taxes.
IRA Investment Options at Discovery FCU
Discovery FCU offers several IRA investment choices for our members:
Traditional IRA
- This IRA option is available to anyone with any income of any kind or amount.
- Contributions are tax-deductible, and both contributions and earnings are tax-deferred until they are withdrawn.
- Withdrawals are taxed, but they are penalty-free after 59 ½ years old.
- Required minimum distribution begins at 72 years old.
Roth IRA
- This IRA investment option is open to anyone with an income less than the IRS limit.
- Contributions are not tax-deductible, but earnings and withdrawals are tax-free.
- After 59 ½, withdrawals are penalty-free.
- There is no required minimum distribution.
Coverdell Education Savings Accounts (ESA)
- When the ESA is opened, the beneficiary must be under the age of 18.
- The IRS sets a modified adjusted gross income limit for any given tax year.
- Contributions can be made as long as the individual’s income falls under the current IRS limit.
- The contribution limit is $2000.00 per year with exceptions for children with special needs.
- Contributions are not tax-deductible.
- Earnings are federal-tax-free as long as they are used for qualified expenses.
- Distributions are tax-free as long as they don’t exceed the beneficiary’s qualified education expenses.
- ESA amounts must be used by the time the beneficiary reaches the age of 30 unless the beneficiary has special needs.
IRA Share Certificates
IRA share certificates offer two benefits: a higher interest rate than a regular savings account and less risk than market-based investments.
Discovery FCU’s IRA share certificate features:
- Minimum deposit of $100
- Term options of 6, 9, 12, 18, 24, 36, 48, and 60 months
- Secure fixed rate
- May have tax advantages
- Early withdrawal penalties may apply
Need Help With Taxes Now?
IRAs are a great vehicle for tax savings, but if you’re looking at a tax bill you can’t afford right now, we can help. Our personal loans offer access to cash for anything you may need at a lower interest rate and with flexible terms.
Don’t put off what you can take care of today. See what Discovery FCU can do for you:
Personal Loan Benefits
- Use the funds for anything you want or need
- Rates as low as 9.24% APR*
- The maximum loan amount is $40,000
- Flexible repayment terms – up to 60 months
- Fast and easy application process.
Apply today! Not a member yet? See why Discovery FCU is a great place to be a member – and an investor!
*APY= Annual Percentage Yield, which is subject to change without notice
APRs are based on your creditworthiness, term of the loan, direct deposit to a Discovery FCU account, and automatic electronic payments from your Discovery FCU account. A sample $5,000.00 loan payment at 9.24% APR at a 60-month term is $104.38. Loan terms range from 24 to 60 months.