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Limitations of an IRA

Feb 16, 2022

Making Sense of IRAs

Attaining financial security in your later years is something that all Americans desire, but few prepare for. Our daily lives can be hectic with our work and short-term needs, making planning for something like retirement seem distant and out of reach. To some, the planning aspect can be daunting, juggling the pressures of our current expenses with the idea of adding an investment account that we likely won’t touch until years down the road.

*Annual Contribution Caps

As you can see whether you are 25 years old or 45 years old, planning for your retirement is something worth investigating, sooner rather than later. By taking the initiative to open either a Traditional or Roth IRA, you will put yourself in a position to save precious dollars on your retirement investments. Consequently, you’ll want to know the tax structure of each so that you can optimize your hard-earned contributions over time.

*Income Limitations on Contributions

A fundamental factor to contemplate is whether you think you will be in a higher or lower income tax bracket than you are now at retirement. While most investors cannot be sure of their future income, you want to do your best to predict. If you anticipate having a higher income by the time you withdraw money, a Roth IRA may be more optimal. Those who see themselves being in a similar or lower tax bracket at withdrawal time, are likely better off selecting a Traditional IRA. One exception to the above paragraph is that high-income individuals face limitations on contributions in a Roth IRA. If your income is above the highest threshold, you may not be eligible to contribute to a Roth IRA at all and thus would defer to opening a Traditional IRA.

For Traditional IRAs:

  • Distributions before age 59½ are subject to a 10% penalty in addition to federal and state taxes unless an exception applies.
  • Starting at age 59½, you can begin taking money out of your IRA without penalty, but you will still be responsible for taxes that might be due.
  • Per the SECURE Act of 2019, as of 1/1/2020, an IRA owner may withdraw up to $5,000 penalty-free from any type of defined contribution plan or a Traditional IRA, upon birth or adoption of a child. Such distributions may also be repaid.

For Roth IRAs:

You can take a penalty-free, federal tax-free distribution of contributions at any time.

You may also take a tax-free and penalty-free distribution of earnings if you meet the following conditions:

  • You made your first contribution to your Roth IRA at least 5 years ago.
  • You are over age 59½
  • Death or disability
  • It is for a first-time home purchase

*Managing an IRA Considering the Limitations

An IRA can be an integral part of your financial toolkit, allowing you to grow your savings and plan for retirement in a tax-advantaged way. Remember, it’s never too late to open a retirement account, and the sooner you get started, the better.

Knowing how to set and follow a plan is an essential element of the process. From a high-level point of view, most often, an individual who anticipates that they will be in a higher tax bracket by retirement is better off choosing a Roth IRA. In contrast, someone who anticipates being in the same or lower tax bracket is better off choosing a traditional IRA.

Whether you are meeting with a financial advisor, an accountant, or doing it yourself, today is the best day to devise a strategy. Think deeply about how much you will contribute and what IRA structure is best for you. Then decide how you would like to invest or trade your capital so that you can compound it over time.
At TradeStation, we provide a user-friendly platform to help you do just that.

Sign up for and start growing your IRA with TradeStation today. Sign up or (800) 822-0512 or (954) 652-7900 to sign up today.

Important Information

*TradeStation does not provide legal, investment, or tax advice. Any potential tax advantages or benefits will depend on your circumstances. The information provided here is for information purposes only, it is not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations and does not resolve any tax issues in your favor. Refer to IRS Publication 590, Individual Retirement Accounts for additional information on IRAs in general and consult your tax professional about your individual tax situation.

Equities, equity options, and commodity futures products and services are offered by TradeStation Securities, Inc. The assets in your TradeStation IRA accounts are assets of a custodial IRA account established with a third-party IRA custodian selected by you.

Investing in securities also involves risks. Past performance is no guarantee of future results. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options, futures, or digital assets); therefore, you should not invest or risk money that you cannot afford to lose. Before trading any asset class, first read the relevant risk disclosure statements on the Important Documents page, found here:

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