The Key to Successful Retirement: What is an IRA?

An “IRA” or Individual Retirement Account is a tax deferred investment account that helps you save efficiently for retirement. Money placed in the account grows tax deferred. Two popular IRA accounts are the Roth IRA and the Traditional IRA. 

Choosing a Traditional IRA, you may get a tax deduction on your contributions for the year that the contribution is made, you then pay tax when you take out the distributions in retirement. There is no income limit to contribute to a Traditional IRA. However, there are income limits to deduct the contributions from your taxes. Phaseouts in 2023 begin for Traditional IRA tax deductions for single filers whose gross income exceeds $73,000 ($68,000 in 2022) and for joint filers with exceeding $116,000 ($109,000 in 2022).  

On the other hand, a Roth IRA has no tax deduction, but distributions in retirement are tax-free, due to the after-tax contributions. There are income limits to contribute to a Roth IRA. The phaseouts in 2023 begin for single filers making more than $138,000 ($129,000 in 2022), and joint filers with more than $218,000 in gross income ($204,000 in 2022). 

So, how does your IRA work? You deposit funds into the IRA each year, allowing you to invest in stocks, bonds, mutual funds, and ETFs. This flexibility to invest differs from most employer sponsored retirement plans, which typically provide a limited number of investment options. How your account grows over time depends on how much you contribute to the account and how well you invest! 

You can contribute to your IRA account each year in addition to contributing to a work sponsored retirement plan, such as a 401(K), 403 (b), and SEP (Simplified Employee Pension). Keep in mind once money is contributed to an IRA, you should not withdraw until after age 59 1/2. However, if you must access these funds earlier, you will pay a 10% penalty and the funds will be included in your gross income to be taxed at your income bracket. For a Roth IRA, you may withdraw the contributions any time, tax-and penalty-free. However, you may have to pay taxes and penalties on any earnings you remove from your Roth IRA. Lastly, owners of Traditional IRAs are forced to begin withdrawing funds the year they reach age 72. More favorably, the Roth IRA does not require you to withdraw money from the account if the account owner is alive.

To contribute to an IRA, you are required to have received taxable earned income. In 2022 you can contribute the lesser of $6,000 or 100% of earned income, with a $1,000 catchup if you are 50 years or older ($7,000 total). Due to inflation, in 2023 you can contribute the lesser of $6,500 or 100% of earned income including a $1,000 catch-up for those aged 50 and older ($7,500 total). If you haven’t made your full contributions to your IRA for 2022, you have until April 18th, 2023.

We realize there are lots of things to remember when planning for retirement. Here at Schenley Capital, we focus on creating strategies that help you maximize your nest egg. Whether it is retirement planning, saving for your child’s future college expenses, or long-term wealth planning. We customize investment plans to help you achieve these goals, along with comprehensive financial planning for all other aspects of your life. Reaching your financial goals is a lifelong project – the sooner you start and more you contribute, the quicker you can enjoy the benefits. We encourage our clients to open tax-advantaged accounts such as Roth IRAs and Traditional IRAs. Call us to set up a meeting! 

Schenley Capital, Inc. 417 Walnut Street Suite 200, Sewickley, PA 15143, (412)-749-9256 (