Many taxpayers may have heard of Individual Retirement Arrangements, or IRAs, but some don’t know how IRAs help them save for retirement.
People can set up an IRA with a bank or other financial institution, a life insurance company, mutual fund or stockbroker. Here’s a list of basic terms to help people better understand their IRA options.
- Contribution. The money that someone puts into their IRA. There are annual limits to contributions depending on their age and the type of IRA.
- Distribution. The amount that someone withdraws from their IRA.
- Required distribution. There are requirements for withdrawing from an IRA:
- Someone generally must start taking withdrawals from their IRA when they reach age 70½.
- Per the 2019 SECURE Act, if a person’s 70th birthday is on or after July 1, 2019, they do not have to take withdrawals until age 72.
- Special distribution rules apply for IRA beneficiaries.
- Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.
- Roth IRA. This type of IRA that is subject to the same rules as a traditional IRA but with certain exceptions:
- A taxpayer cannot deduct contributions to a Roth IRA.
- For some situations, qualified distributions are tax-free.
- Roth IRAs do not require withdrawals until after the death of the owner.
- Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.
- Simplified Employee Pension. This is known as a SEP-IRA. An employer can make contributions toward their own retirement and their employees’ retirement. The employee owns and controls a SEP.
- Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.
The October 15 filing deadline for taxpayers who requested an extension to file their 2019 tax return is quickly approaching. Taxpayers should remember they can file whenever they’re ready and don’t have to wait until Thursday, Oct 15.
These tools are available at IRS.gov to help people with their taxes:
- IRS Free File and other electronic filing options. Taxpayers can file their tax return electronically for free through IRS Free File. Other electronic filing options include using a free tax return preparation site, commercial software or an authorized e-file provider.
- Direct deposit for refunds. The fastest way for taxpayers to get their refund is to file electronically and use direct deposit. Refunds can be deposited in up to three accounts. Taxpayers can also use their refunds to purchase up to $5,000 in U.S. Series I Savings Bonds.
- Online payment options. If an extension filer owes taxes, they should pay as much as possible by the Oct. 15 deadline to reduce interest and penalties. IRS Direct Pay allows individuals to securely pay from their checking or savings accounts. Visit IRS.gov for additional payment options.
- Account information and tax records. Individual taxpayers can visit IRS.gov to manage their account. This includes viewing their balance and payment history, paying taxes and accessing tax records through Get Transcript.
These people may have more time to file their tax return:
- Military members serving in a combat zone or a contingency operation in support of the Armed Forces generally get more time to file.
- People who have a valid extension and are in – or affected by – a federally-declared disaster may be allowed more time to file.
Taxpayers should keep a copy of their tax return and all supporting documents for at least three years.
All taxpayers should review their withholding annually. They can use the IRS Tax Withholding Estimator to check and make sure they’re not having too little or too much federal tax withheld. This tool offers workers, retirees and self-employed individuals a step-by-step method to help figure out if they should adjust their withholding.
Those who need to adjust their withholding should submit a new Form W-4, Employee’s Withholding Certificate to their employer.
People who should check their withholding include those:
- who are part of two-income families
- working two or more jobs or who only work for part of the year
- with children who claim credits such as the child tax credit
- with older dependents, including children age 17 or older
- who itemized deductions on their 2019 tax return
- with high incomes and more complex tax returns
- with large tax refunds or large tax bills for 2019
- who received unemployment at any time during the year
The IRS Tax Withholding Estimator can help taxpayers check their withholding.
- This tool will help determine if they should complete a new Form W-4.
- It will also help users determine what information to put on a new Form W-4.
- It will save them time because they don’t need to complete the form worksheets. The Estimator does the worksheet calculations.
Taxpayers who complete a new Form W-4 should submit it to their employer as soon as possible. With withholding occurring throughout the year, it’s better to take this step sooner, rather than later.
People should generally increase withholding if they hold more than one job at a time or have income from sources not subject to withholding. If adjustments aren’t made for these situations, they will likely owe additional tax and possibly penalties when filing their tax return.
On the other hand, people should generally decrease their withholding if they are eligible for income tax credits or deductions other than the basic standard deduction.
Having the most recent pay statements, information for other income sources and the most recent income tax return can help taxpayers use the Withholding Estimator to figure out their correct withholding.