Individual Retirement Accounts (IRAs)
You can build your retirement nest egg and get a tax benefit with an IRA. Choose from a traditional IRA or a Roth IRA. Traditional may let you deduct some or all of your contribution, and you pay taxes only when you withdraw the funds (probably after you’ve retired). A Roth IRA lets you contribute money that’s already been taxed, but you may avoid taxes when you make withdrawals. Your local TowneBank banker can help you open either, as well as inform you about SEP (Simplified Employee Pension) plans.
Why an IRA?
| Compare Accounts |
Roth IRATax advantages at withdrawal. |
Traditional IRATax advantages for your contributions. |
|---|---|---|
Tax Benefits |
Roth IRAContributions are not tax-deductible Earnings may grow tax-free Withdrawals may be tax-free |
Traditional IRAContributions may be tax deductible |
Contributions |
Roth IRAMake annual contributions $6,000 per year or the individual’s taxable compensation for the year For those over 50 in the beginning of the year – an additional $1,000 per year |
Traditional IRAMake annual contributions $6,000 per year or the individual’s taxable compensation for the year For those over 50 in the beginning of the year – an additional $1,000 per year |
Terms |
Roth IRAIRA CD terms range from seven days to five years |
Traditional IRAIRA CD terms range from seven days to five years |
Eligibility |
Roth IRAYou can begin a Roth IRA at any age Must have taxable compensation Some income limits can apply. Speak to an investment professional for more information |
Traditional IRAYou can begin an IRA at any age Must have taxable compensation No minimum income limits |
Withdrawals |
Roth IRAWithdrawal of contributions without tax penalty Withdrawals of earnings can be subject to taxes unless a qualified distribution No mandatory withdrawals |
Traditional IRAAfter 59 ½ are without penalty Withdrawals before 59 ½ can be subject to a tax penalty (some exceptions can apply) Mandatory withdrawals beginning the year you turn 72 |
What about a Simplified Employee Pension Program (SEP)?
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A Simplified Employee Pension (SEP) is an Individual Retirement Account (IRA) that an employer or self- employed person can establish for themselves and any eligible employees. The employers make the contributions on behalf of the eligible employee’s therefore, the employer receives any favorable tax benefits.
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- Contribution limits for a SEP are greater than a Traditional or Roth IRA. SEP contribution limits are the lesser of 25% of each eligible employee’s compensation or the annual cap set by the IRS each year.
- Contribution percentage must be the same for all eligible employees, including the business owner.
- SEP contributions are made to a Traditional IRA in the name of each individual employee. Employees are immediately 100% vested in their SEP.
- Contribution deadlines for a SEP are on or before the employer’s tax filing due date plus any extensions.
- Distribution requirements for a SEP are the same as a Traditional IRA.
- A SEP can be combined with a Traditional IRA.
- A SEP can be converted to a Roth IRA. (The 10% early withdrawal penalty does not apply; however, taxes are due on the amount converted.)
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SEP IRAs generally work best for self-employed people or small business owners with few or no employees. When an employer decides to establish a SEP plan, they can require employees to meet certain requirements before being eligible to participate in the plan. These requirements will apply to the business owner as well as the employees. Here are some criteria to keep in mind:
- Age requirement – The IRS allows an employer to select age 21 or younger as a requirement.
- Service requirement – An employer can choose a service requirement of less than three years but cannot choose a requirement of more than 3 years of the previous 5 years.
- Compensations below $600, union member, and/or nonresident alien status may disqualify an employee.
Individuals can make only one rollover from an IRA to another (or the same) IRA in any one-year period regardless of the number of IRAs you own. However, individuals can continue to make unlimited trustee-to-trustee transfers between IRAs because it is not considered a rollover. Furthermore, individuals can also make as many rollovers from a Traditional IRA to a Roth IRA (also known as 'conversions').
IRS Publication 590-A and 590-B
Information on IRAs was previously provided by the IRS in Publication 590. This document was updated in January 2015, and has now been split into two parts: 590-A, which covers contributions to traditional IRAs and Roth IRAs, as well as rules for rollover and conversion contributions, and 590-B, which covers distributions from traditional IRAs and Roth IRAs, as well as rules for required minimum distributions and IRA beneficiaries. These documents may change from time to time, and if you would like to review current or future versions, please visit the IRS website at By clicking this link you are opening a window in a new tab.By clicking this link you are opening a window in a new tab.www.irs.gov(Opens in a new window) and in the search box enter 'Publication 590.' As an added convenience, you can pick up a printed version from your hometown banker or call (757) 686-7199 and we will be happy to mail you a copy.