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How an IRA Works

Whether you are just beginning to save for retirement or have been saving for a while, Individual Retirement Accounts (IRAs) provide another method for saving. Understanding how an IRA works is simple, but there are a few restrictions you should know before opening an account.

Keep reading to learn how IRAs work and if they are a good option for you.

What Is an IRA?

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IRAs are tax-advantaged savings accounts that were created as a method for saving for retirement. 

There are two main types of IRAs:

The main difference between the two accounts is the tax benefits you may receive. 

How Does a Traditional IRA Work? 

Your contributions into a Traditional IRA are made with pre-tax dollars. If eligible, you may be able to deduct up to the contribution limit from your taxable income in the year you contribute.

You can begin making withdrawals from a Traditional IRA without penalty when you reach 59 ½. If you withdraw money before this age, you will generally have to pay a 10% IRS penalty tax in addition to ordinary income tax.

Additionally, you can continue to let your money grow until you are 70 ½ years old. When you reach this age, you must begin withdrawing from your account. Your distributions will be taxed as ordinary income during the year you withdraw your money.

How Does a Roth IRA Work?

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A Roth IRA is another type of tax-advantaged savings account, where you earn the tax benefit when you take money out of your account. Contributions to a Roth IRA are not tax-deductible and are made with post-taxed dollars.

Your IRA contributions are subject to IRS limits that change annually. Note that an account holder may make contributions to last year’s IRA until the tax filing deadline in the current year (typically April 15th).

You can generally make distributions from a Roth IRA without penalty when the account has been opened for more than five years and you reach age 59 ½. You may also withdraw money from a Roth IRA for eligible qualified distributions that meet IRS requirements. However, Required Minimum Distributions (RMD) are not mandatory with a Roth IRA.

How Do I Open an IRA?

To open a Traditional or Roth IRA, you can download Synchrony Bank’s online application, fill it out, and mail it back to us. You can also call one of our savings account representatives to assist you in filling out the IRA application form.

Synchrony Bank does not provide tax advice so be sure to contact your tax advisor or financial consultant before opening or contributing to an IRA.

Open an IRA with Synchrony Bank

If you are looking for products to save for retirement, see how Synchrony Bank’s IRAs work for you. In addition to our IRA options, we also provide award-winning customer service and FDIC insurance up to $250,000 per depositor for each ownership category.

Call us today at 1-844-345-5789 to learn more about your IRA options.

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Sources:

IRS: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits


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