IRA stands for Individual Retirement Account, the full name is Individual Retirement Account, also known as traditional IRA. This is a savings retirement plan that you create, fund, operate, and withdraw completely by yourself. It is characterized by:
No need to go through the employer: IRA only needs you to decide to open the plan, and you can go directly to the bank or financial institution to open an account. There is no limit to the number of accounts, and you decide how much to save and which IRA account to save each year. But when you file your taxes every year, remember to give the accountant the amount of contributions to all your IRA accounts for the year.
Type of contribution funds: The funds invested in the IRA account cannot be higher than the labor income of the year. That is to say, both full-time and part-time jobs must be Earned Income from labor income before they can be used as IRA contributions, such as: wages, bonuses, commissions, tips, self-employed profits, etc.
The operation of account funds is flexible: deposit funds can be handled by going to the bank or their related apps. Before withdrawing, the funds in the account can be invested in stocks, funds, bonds, etc. according to your preferences.
Contribution limit: If (in 2022) single income does not exceed $68,000 (couple $109,000), then the contribution (contribution) to the IRA account can be up to $6,000 in that year (people over 50 years old can add $1,000 to a maximum of $7,000).
Annual deposit time: 1/1 of each year to 4/15 of the second year. So in addition to 365 days in a year, you can also deposit for the previous year in the first 4.5 months of the second year. For the overlapping four and a half months, you can choose to contribute for the previous year or for the current year.
Withdrawal age: Since it is a retirement account, it must meet certain conditions before it can be withdrawn. The earliest withdrawal age for the first time is 59.5 years old, below this age there will be a fine of 10% of income tax; the latest withdrawal age for the first time is 72 years old on April 1st of the second year.
Upper age limit for deposits: Starting in 2020, there is no maximum age limit.
Delayed tax payment: Although in practice we often deposit tax-deducted income in IRA, when filing taxes, as long as your income meets the corresponding requirements, the funds invested in IRA that year will be defined as pre-tax income. That is, when you file a tax return, your total income will be deducted from the amount invested in the IRA for the year. Invisible income and taxes are likely to be reduced. And the money in the IRA account will not be taxed until you withdraw it in retirement.
In the following special-purpose situations, you can receive IRA in advance and only need to pay taxes without penalty:
for higher education.
Receive up to $10,000 for your first home purchase.
Unsubsidized medical bills up to 7.5% of income.
Pay Medicare premiums when you are unemployed (more than 12 weeks).
A fixed amount of cash will be withdrawn every year for the rest of your life.
Active duty military with more than 179 days of service.
permanent disability.
There is another popular individual retirement plan: the Roth IRA. Similar to IRA, but Roth IRA differs from IRA in the following ways:
Contribution limit: If your single income (in 2022) does not exceed $129,000 (couple $204,000), then the total contribution (contribution) in the personal Roth IRA account this year is up to $6,000, and those over 50 years old can add $1,000, which is a maximum of $7,000.
Contributions from after-tax income without delay in tax payment: Only the salary after tax has been paid can be put into Roth IRA. Although there is no way to reduce taxes during the working year, if the funds in the account work well, no matter how the value increases when withdrawing, there is no need to worry about taxation.
Minimum withdrawal age: The principal can be withdrawn after the account is opened and deposited for 5 years, but the income cannot be withdrawn. After the age of 59.5, you can freely withdraw funds like an IRA.
Personal tax must be submitted annually by yourself or your family or by an accountant, and cannot be done by the unit or institution you work for. Normally, the period from the end of January to April 15th is the time window for summarizing and declaring the income of the previous year, and fines may be incurred if it is overdue. In addition to the federal tax bureau IRS at the national level, various tax forms and material submission departments may also have state and local tax bureaus, financial supervisory bureaus and other departments. In order to standardize the large-scale tax declarations across the country every year, the formal “organization” or “person” that gives you funds/assets should provide relevant vouchers and tax forms before you file taxes, such as W-2 or 1099-NEC for employers to pay wages, 1099-INT for the bank to issue interest, 1099-G for the government to issue unemployment benefits, etc. It should be noted that if there are errors/omissions in the personal declaration, there may be a progressive fine according to time, please make sure to pay the tax in time; at the same time, please collect or scan all tax forms, bills or vouchers for tax inspection purposes.
The opinions expressed by HHL Advisors Group are for information sharing only and do not constitute any legal advice.
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