We won’t cover all there is to know about IRAs here but will touch on some basics and lesser-known details. It is well known that there are two major types of IRAs: Traditional IRAs which are funded with pre-tax contributions and Roth IRAs, which are funded with after tax contributions. Both offer tax-free growth. Because IRAs were designed as a vehicle to fund retirement, withdrawals are assessed a penalty if made before 59.5 years old and would be taxed according to your tax bracket.

Let’s first look at the Traditional IRA. Pre-taxed contributions mean taxes are deferred until funds are withdrawn. The earnings will also be taxed at that point. Traditional IRAs offer eligible contributors a tax deduction. In some cases, there is no deduction for contributions so they would not be taxed upon withdrawal. There are no income limits for contributions to a Traditional IRA.

Now for the Roth IRA. Roth IRAs offer no deductions but allow tax-free withdrawals once certain conditions are met. This includes the earnings. There are income limits for eligible contributions to a Roth.

There are lesson-known details about IRAs as well and the following are not all-inclusive. There are exceptions to the penalty which include higher education expenses, first-time home purchases, and certain medical expenses. IRA funds cannot be used for certain investments or transactions like property for personal use or to invest in a business where you hold a controlling interest. As it relates to college financial aid, funds in an IRA are not considered an asset on the Free Application for Federal Student Aid (FAFSA). However, withdrawals can count as income, which can affect your child’s financial aid eligibility.

Hopefully, this provided you with a little more insight into IRAs or provoked you to learn more about them.