An IRA is Individual Retirement Account trust. Although we use the term “IRA” for this, the term can further be utilized for any type of qualified retirement plan, like a 401K or a SEP-IRA, etc.
Essentially, when you contribute to a plan like this, you’re putting money into the account trusts before taxes. Afterwards, you’re claiming the tax deduction on your income taxes.
This money grows. Whichever investment you’ve chosen is then tax-free. At a certain point, when you remove the money, you need to pay the taxes. When you remove the money, that money is then considered your income.
What Kind of Accounts Have a Similar Setup?
Similar accounts include 401Ks, 403Bs, and annuities. These accounts are usually found with IRAs and Roth IRAs.
Does the Investment Go into the IRA Pre-Tax and Then, It Grows Inside of the IRA Continually Without Paying Taxes?
Yes! This is precisely it.
The IRA is very powerful. That’s why, for most people, the IRAs are their major assets. I’ve seen people with millions of dollars in IRA accounts. It’s not so uncommon because IRAs have been around since the 80s.
If people are stocking money away for their retirement for thirty years, and the money’s growing without taxes, the IRA can get really big. Therefore, it’s not unusual to see $400,000 to $600,000 or more in IRAs.
What Things Can a Person Own Inside of an IRA Account? Stocks, Bonds, or Other Things?
There are “Self-Directed IRAs” that allow a wide range of investments, but are sort of gimmicky and I don’t recommend them. Typically, the investments inside of an IRA are going to be stocks, mutual funds, investment portfolios, bonds, or annuities.
What Happens if You Hold Stocks in an IRA? Can You Sell Them and Buy Different Stocks? Would You Have to Pay Capital Gains or Will They Remain Until the Time You Take the Money Out?
The stocks are there until you take them out. Theoretically, you could trade an IRA account. If you’ve made money, you wouldn’t even pay capital gains taxes until you remove the money from the IRA.
The whole idea behind the IRA is that you’re deferring the growth of the money, and only paying taxes on the withdrawals, at hopefully a lower tax rate.
In a Roth IRA, Do You Deposit After Tax Money, and Do You Not Have Tax after the Withdrawal?
This is correct. Roth IRA is obviously tax-free. However, you don’t receive the benefit of the tax deduction on your income taxes when you deposit the money into the Roth IRA.
In the Future, When You Withdraw the Money, Are there any Taxes on it?
When you’re dealing with an IRA, you must begin to take the money out at specific times. The earliest that you can withdraw the money without penalty is at the age of 59 1/2. Of course, you could remove the money at any time. However, you must pay a 10 percent penalty if you take it out before this specific age.
When you turn 70 1/2, you must remove the money. If you don’t, you receive a 10 percent penalty. These withdrawals that occur when you’re 70—when you might have millions of dollars in your IRA—are set by the IRS. They’re called the Required Minimum Distributions, or “RMDs”.
Basically, the Required Minimum Distributions is calculated by your age. Therefore, if you have one million dollars in your account and you’re 70 years old, the IRS considers you to have a theoretical life expectancy of 30 additional years. You must remove this money. It is reported as ordinary income.
For more information on IRA Trusts, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (949) 660-0007 today.