IRA Extension & Tax Benefits
Updated: May 31, 2020
An Individual Retirement Account (IRA) offers valuable tax benefits for people saving for retirement. The deadline to contribute to an IRA is normally the same as the deadline to file your tax return: April 15. But due to the coronavirus pandemic, the federal government has extended the tax filing and payment deadline by 90 days to July 15, 2020.
What is an IRA?
An Individual Retirement Account (IRA) is a retirement savings account with tax benefits. There are four main types of IRAs: Traditional IRA, Roth IRA, SEP-IRA, and Simple IRA. As well as the following types of IRAs: backdoor Roth, spousal, self-directed, inherited, and rollover.
How does an IRA work?
You invest the money that's in your IRA. You can invest in stocks, bonds, and other assets. For a long-term goal like retirement, it’s generally recommended to invest with stocks and bonds because of their higher returns.
You can open an account at a bank or a broker. With a broker, you’ll be able to invest in stocks and bonds, while banks generally offer Certificates of Deposit and savings accounts.
Working people can add money to their accounts every year. Generally, you (or your spouse) must have earned income to contribute to an IRA.
There's a limit to how much you can contribute every year. Two of the most popular types of accounts — the traditional and the Roth — allow you to save $6,000 per year ($7,000 if you’re 50 or older), even if you’re also contributing to a 401(k) or other workplace savings plan. Those annual contribution limits are the same for both 2020 and 2019.
The withdrawal rules do let you withdraw your money any time, but you may face a 10% penalty and a tax bill if you take out your money before age 59 1/2, unless you qualify for an exception.
A Required Minimum Distribution (RMD) is the amount of money you must withdraw from your traditional, SEP, or SIMPLE IRA each year once you turn 72--take note, this recently increased from age 70 ½. Otherwise, you face a 50% penalty of your RMD. This year, however, the RMD was suspended under the coronavirus emergency stimulus package.
The RMD is calculated by dividing your total account balance by your life expectancy. A table to calculate this is listed in Appendix B of IRS Publication 590-B. If you have multiple accounts, you must calculate your RMD for each.
Your withdrawals will be included in your taxable income; possibly you will fall into a lower tax bracket during retirement, which would ultimately save you tax dollars overall.
When should I set up an IRA?
Now! It’s been said many times: start early.
Even though you might have decades of the working-life left, every year is critical when profiting off compound interest. If you invest $6,000 a year at a 6% growth rate until retirement (at age 67), you would lose around $78,000 if you delayed investing to age 23 from age 22.
With the delayed deadline, you still have time to put money into your IRA if you missed out.
You can easily set up an IRA account on the Newday platform. Just download our app and select a cause that resonates with your values (and 5% of revenue will go to an NGO partner tackling a global challenge like gender equality or ocean health!).
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For comprehensive details on retirement plans, review the IRS’s publications and always consult with your own tax, legal and accounting advisors before engaging in any transaction. Newday does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice.