2023 Taxes Cheat Sheet - Flipbook - Page 7
2018 UPDATED EDITION:
Retirement Taxes Cheat Sheet
Individual Retirement Arrangements (IRAs)
Traditional IRA Account
A traditional IRA is a popular form of individual retirement savings plan. Participants
receive a current year tax savings on amounts contributed up to the annual maximum,
along with tax deferred growth until funds are withdrawn. If funds are withdrawn prior to
age 591/2, a 10% tax penalty in addition to ordinary income tax is due on the amount
withdrawn. Future withdrawals, including the initial amount contributed, are taxed as
ordinary income, as opposed to capital gains tax. Defined contribution plans, such as a
traditional 401k, can be “rolled over” to IRA accounts without incurring current year tax
liability and maintaining deferred tax status. At age 701/2, Required Minimum Distributions
(RMD) apply to traditional IRA balances, forcing participants to remove assets and pay
ordinary income tax on the withdrawal amount.
Roth IRA Account
As part of groundbreaking legislation known as the Taxpayer Relief Act of 1997, the
Senate Finance Committee led by Senator William Roth effectively established his
namesake retirement plan, the Roth IRA. Although annual contribution limits are the
same, the Roth IRA is much different than the Traditional IRA. Contributions are made
with “post-tax” dollars and all future distributions (after age 591/2) are not subject ordinary
income tax. The promise of tax-free income in retirement is appealing to many retirees,
causing many pre-retirees to consider a “Roth Conversion”, which involves paying tax on
a portion of traditional IRA assets before retiring in order to receive tax-free income
during retirement. In order to qualify, income must be below a certain threshold. To fully
contribute to a Roth IRA, individuals must make loess than $137,000 and married couples
must make less than $203,000. There are no income limits for “Roth Conversions”.
2019 Contribution Limits For All IRA Accounts
The 2019 contribution limits for Traditional IRA participants is
$6,000. If the participant is over age 50, the catch up provision
allows for an additional $1,000 contribution for a total of $7,000.
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