Traditional IRA vs Roth IRA(p1)

IRA is an individual retirement arrangement and is a tax advantage vehicle specifically designed for an individual to save for retirement.

It is possible to move funds from a traditional IRA to a Roth ivory this move is called a conversion.

1099-R form is used to report a distribution from a retirement plan.

Traditional and Roth IRA fundamentals

The Congressional research service reports IRAs were first authorized by the employee retirement income security act of 1974 (ERISA) and eligibility was initially limited to workers without pension coverage.

The economy recovery act of 1981 made all workers and their spouse eligible to contribute to an IRA and the taxpayer relief act of 1997 authorized Roth IRA . Resource: https://crsreports.congress.gov/product/pdf/RL/RL34397

Unlike retirement plans set up by employers, IRAs are tax advantage retirement savings accounts that individuals setup on their own at financial service institutions of thier choice.(Your bank, credit union or brokage firm)

Flexibility and contributions into an IRA:

• An individual can own and contribute to multiple (IRAs traditional and Roth).

• Contributions can take place any time throughout the year.

• IRAs also allow contributions to be designated for the previous year after the start of the following year, up until the tax return deadline(January 1st up until tax filing deadline of the following year.)

Limitations on traditional and Roth IRAs.

An individual is limited on the amount of money they may annually contribute to all of their IRAs combined. The max amount is determined by two things the person's compensation (earned income) and age.

Limitations based on age:

50 and younger maximum contributions for 2023 is $6,500.

50 and over $7,500.

Limitations based on compensation:

limits contribution by their compensation amount.

ex.) If single and make $2,000, they can only contribute $2000 across all IRAs.

ex.) if married, each spouse contributes up to their compensation(maximum of $6,500 or $7500) based on age.

Total of combined contribution cannot be more than taxable compensation repoerted on their joint return.

Spousal IRA

If individual has compensation and spouse has none, and couple files jointly. Spouse with compensation can ontribute(up to the maximum amout) to spouse IRA(provided the individual has sufficient earned income)

Compensation

• Non-taxable combat pay

• Commission

• Wages

• Self-employment earnings

Not compensation

• Pension

• Rental property

• Excluded foreign earned income

• Investments

Contributions made to Traditonal IRA do not reflect on your income(deductible)

(Compensation - contribution = adjusted incom basis)

Note: Roth IRAs are not deductible