• info@kaizencpa.com
  • Our Office: USA - Hong Kong - Shenzhen - Shanghai - Beijing - Taiwan - Singapore - Japan - UK

+852 2341 1444(Hong Kong)
+86 755 8268 4483(Shenzhen)
+65 6438 0116(Singapore)

Search for anything.

Knowledge

  • Home
  • Knowledge
  • Introduction to American IRA

Introduction to American IRA

2024-11-11
  1. What is American IRA

    Individual Retirement Accounts (IRAs) are investment vehicles designed by the U.S. Congress to provide tax incentives to save for retirement. Assets in an IRA are typically managed by an account custodian and are invested as individuals based on goals and direct inputs.

    There are many types of IRAs, including some that offer tax breaks in the same year the money is deposited, and others that allow money to be withdrawn tax-free at any time. The two main types of individual retirement accounts (IRAs) are traditional IRAs and Roth IRAs.

  2. Traditional IRAs

    Traditional IRAs were originally created by Congress in 1974 under the Employee Retirement Income Security Act (ERISA). This legislation provides special tax treatment for money deposited into IRAs and sets standards and rules to protect people who invest in these plans and prevent misuse of funds. Traditional IRAs are best for those who believe they will have a lower tax rate in retirement and for those who do not have access to other retirement plans such as a 401(k) through their employer.:

    Traditional IRAs include traditional retirement accounts where pre-tax funds can be contributed (deductible IRAs) and retirement accounts where pre-tax funds cannot be contributed (non-deductible IRAs).

    (1)
    		 Traditional Deductible IRAs
         
    The feature of this account is that contributions are made with pretax dollars and subsequent withdrawals are fully taxed. Additionally, the purpose of the special tax rules for IRAs is to provide incentive for individual retirement savings. Therefore, there is a 10% penalty for early withdrawal (generally, before age 59½). This 10% penalty is in addition to ordinary income tax and cannot be deducted when determining ordinary income tax.
    (2)
    		 Traditional Nondeductible IRAs

    The feature of this account is that contributions are made with after-tax dollars and subsequent withdrawals are taxed only to the extent of income earned on the contributions. These accounts are primarily aimed at people with very high incomes or adjusted gross income (AGI) above the minimum, who are prohibited from contributing to an IRA with pre-tax amounts but can still contribute to the IRA. This group of people will only be taxed on the income/gain portion of the IRA when they withdraw from an IRA that has no pre-tax contributions after retirement.

  3. Roth IRAs

    (1)
    		 Roth IRAs were created by the Taxpayer Relief Act of 1997. Individuals can withdraw money from their Roth accounts at any time, in many cases incurring no fees and paying no taxes.  Roth IRA is best for people who expect a higher tax rate in retirement. So, Roth IRAs can also serve as an emergency fund for many people.
    (2)
    		 Roth IRAs income tax-free and penalty-free withdrawal prerequisites:
    (a)  The Roth IRAs has been in existence for at least five years.
    (b)  The payer must be at least 59 and a half years old to stop making contributions.
    (c)  Payers use the money to cover up to $10,000 for the first home purchase.
    (d)  Death or disability of the contributor

  4. The Comparison of Traditional IRAs and Roth IRAs

    (1)
    		 Similarities
           
     (a)  Contributions must be made at the same time of year.
     (b)  Contributions to Roth IRAs are limited to the lesser of an annual maximum    indexed for inflation ($6,000 for 2022 with an additional catch-up contribution for taxpayers age 50+ of $1,000), and taxpayer's taxable compensation for the year.
     (c)  As with traditional IRAs, Roth IRA contributions made in past years are allowed to remain in the IRA regardless of the level of modified AGI in future years
    (2)
    		 Differences:

     (a)  No Required Minimum Distributions (RMDs) are required from Roth IRAs (except inherited Roth IRAs). But traditional deductible IRAs require taxpayers to make minimum withdrawals after age 72.
     (b)  In contrast to traditional deductible IRAs, Roth IRAs are after-tax funds and withdrawals are tax-free.
     (c)  Traditional deductible IRAs allow for tax deductions on contributions, while Roth IRAs do not.

Disclaimer

All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

WhatsApp/Line/Wechat: +852 5616 4140

Related Posts

Introduction to Voting Power of Shareholders in the U.S. Corporation

Voting rights pertain to the entitlement of corporate shareholders to participate in decisions regarding corporate policies. Typically, only shareholders of record have the privilege to vote either in person or through a proxy (unless they possess non-voting shares) during a shareholders' assembly. The corporate records will list the owners of all outstanding shares, along with the record date preceding the meeting.

Introduction about U.S. Marketplace Facilitators and Sales Tax

With the establishment of Economic Nexus, many states have enacted Marketplace Facilitator Acts (MFAs) that require some Marketplace Facilitators to be responsible for collecting and remitting sales tax on behalf of remote sellers. Marketplace Facilitators generally are required to obtain a seller’s permit or register a seller's sales tax number firstly for a marketplace or platform’s seller in a particular state

What Remote Sellers Need to Know About U.S. Sales Tax

Before Sales Tax Reform, a seller must have a “taxable nexus” in a state before the state can require the seller to collect and remit sales and use tax. Therefore, remote sellers should also be considered physically present to be subject to sales tax. For example, having an office or other place of business in the state, hiring employees in the state, or holding a property in the state.

What are U.S. sources of retirement income?

Nearly 35 million Americans were 65 or older in year 2000，and the average American, according to the U.S. Census Bureau retires at age 63. As the minimum guaranteed system of federal pensions (Social security payment) led by the US government has gradually weakened in recent years, the US pension market is mainly dominated by the social security system, which gradually favors the savings pension insurance dominated by individuals and enterprises.