Individual Retirement Accounts (IRA)

There are several differences between these two main types of IRA.

First, a Traditional IRA is taxed when you withdraw the funds, ideally after the age of 59½ to avoid early withdrawal penalties. This could be a good idea if your income and tax bracket is likely to be lower in future than it is now.

A ROTH IRA is taxed when you make the contributions, so you know that what you have in your account and future earnings will all be tax free. A ROTH IRA has fewer restrictions on when you can make withdrawals.

A Traditional IRA has no income limits to open an account, but there are income limits to your tax-deductible contributions. A ROTH IRA has income limits in order to make contributions. With a Traditional IRA, you have to start taking required minimum distributions (RMDs) at age 72. This is a certain amount of money the IRS says you must withdraw each year. ROTH IRAs do not have RMDs.

You need a minimum deposit of just $100 to get started on any type of CommonWealth Credit Union IRA Account -- then sit back and watch it grow!

You can contribute a maximum of $6,000/year (as of 2021).

If you're over 50, you can also make catch-up contributions of $1000/year. This is to allow you to make up for previous years where you didn't reach your $6,000 limit.

If you go over the contribution limit of your Traditional or Roth IRA, your excess contributions will be subject to a 6% excise tax for each year that those extra funds are in your account.

Depending on the type of IRA you have, penalties for early withdrawal can be as much as 10% of your savings, plus you might owe taxes. So be sure to check with your financial advisor to find out the exact terms of your account before you make any withdrawals.

For a Traditional IRA, you will likely be penalized if you make withdrawals before the age of 59½.

For a ROTH IRA, you may be able to withdraw your contributions anytime without penalty. But there may be penalties if you try to withdraw your earnings before age 59½ or before you've held the account for five years.

There are a few ways you can use an IRA account to your advantage when it comes to taxes. The advantages are different for a Traditional IRA vs. a ROTH IRA so be sure to check with your financial advisor about which is best for you.

For a Traditional IRA, your contributions may be tax deductible. You will then pay taxes when you make withdrawals (ideally after age 59½). This could work in your favor if your future tax bracket will be lower than it is now.

For a Traditional IRA, your eligibility to take a tax deduction on your contributions is based on three factors:

• Whether you or your spouse are active participants in an employer-sponsored retirement plan
• Whether your tax return filing status is married, filing jointly; married, filing separately; or a single filer
• Your modified adjusted gross income (MAGI)

For a ROTH IRA, your contributions are not tax deductible. You pay taxes when you make the contributions, which means your future withdrawals will not be taxed. This could work in your favor if your income and tax bracket will be higher in future than it is now.

Yes, you can open an IRA with your preferred financial institution any time you like, regardless of whether you have another kind of retirement account. In fact, it's a good idea not to keep all your eggs in one basket!

Note that if you have an employer-sponsored retirement plan, your contributions to a Traditional IRA may not be tax deductible.

An IRA transfer is when your funds are moved directly from one IRA to another. If you do receive a check, it will be made payable to the receiving financial organization for the benefit of your IRA. You won’t be able to cash and deposit the check into another personal account.

This type of transaction is not reported to the IRS. And because transfers are not subject to timing requirements, you can perform as many IRA transfers as you wish.

Transfers can only take place between eligible retirement accounts. For example, you may transfer Traditional IRA assets to another Traditional IRA (including one holding SEP contributions) or to a SIMPLE IRA.

Roth IRA assets can only be transferred to another Roth IRA. You cannot transfer assets between Traditional and Roth IRAs.

To complete an IRA rollover, you must first take a withdrawal and then return the money to the same IRA or to another IRA within 60 days. The money will be deposited into a non-retirement account (such as your checking or savings account) or you’ll receive a check made payable to you.

You may want to complete a rollover, rather than a transfer, if you need to use the money for a short amount of time before returning it to an IRA.

Rollover rules require the assets to be returned to an IRA within 60 days, which starts the day after you receive the assets. You may complete only one IRA-to-IRA rollover within a 12-month period.

Because a rollover involves withdrawing funds from your IRA, it is a reportable transaction to the IRS. If the assets aren’t timely returned, then you will pay taxes, and possibly a 10 percent penalty tax, on the distribution.