What is an IRA? Roth IRA and Traditional IRA explained | HSBC
What is an IRA (individual retirement account)?
An Individual Retirement Account (IRA) is a tax–advantaged retirement account that you own and control. Earnings generated can compound on a tax–deferred basis until withdrawal.
There are two types of IRAs: Traditional and Roth. Both types allow the same maximum annual contributions, based on your age. The maximum is reached when your combined contributions to all of your IRAs meets the limit. The two types of IRA differ in their qualifying criteria, withdrawal restrictions, and tax implications.
- Traditional IRAs offer potential for tax-deductible contributions depending on your income level, participation in a workplace retirement plan, and marital status. Otherwise, contributions may be made post–tax.
- Roth IRAs do not permit tax-deductible contributions. However, contributions with post-tax dollars can be withdrawn tax-free. If you are not eligible for tax-deductible contributions to a Traditional IRA due to a higher income, you may be eligible for a Roth IRA.
Compare Roth and Traditional IRAs side by side
Use the chart below to easily compare the features and qualifications of the two types of IRAs:
|Traditional IRA||Roth IRA|
|Eligibility: Age||You must be under age
||No age limit|
|Eligibility: Income||No income restrictions||Those with 2014 modified adjusted gross income (MAGI) below $114,000 if single, or $181,000 if married and filing jointly may make full contributions
Those with 2014 MAGI equal to $114,000 but less than $129,000 if single, or $181,000 but less than $191,000 if married and filing jointly may make partial contributions
Those with 2014 MAGI equal to or greater than $129,000 if single, or $191,000 if married and filing jointly are ineligible to contribute
|Maximum Annual Contribution||Individual: $5,000
Married filing jointly: $10,000 (up to $5,000 each)
Married filing jointly: $10,000 (up to $5,000 each)
|Catch up contribution||If you are age 50 or older in the year of contribution, eligible IRA holders can make an additional contribution of $1,000||If you are age 50 or older in the year of contribution, eligible IRA holders can make an additional contribution of $1,000|
|Tax Implications: Contributions||If you do not participate in an employer sponsored retirement plan, such as a 401(k), contributions are:
If you do participate in an employer sponsored retirement plan, contributions are:
|Contributions are not tax deductible|
|Tax Implications: Earnings||Earnings are tax-deferred until withdrawn
||Earnings are not subject to federal tax penalties if withdrawn after age
Earnings are tax-free if taken as part of a qualifying withdrawal
|Tax Implications: Withdrawals||After age
Withdrawals prior to age
Contributions can be withdrawn at any time without penalty as long as held for five years
Earnings withdrawn before age
|Age for Required Distributions||Distributions must begin by April 1 of the year after turning age 70½. Required minimum distributions are determined by dividing the prior year–end fair market value of the retirement account by the applicable distribution period or life expectancy||There is no mandatory age for taking distributions|
Call us at 866.586.4722 or email us to schedule your complimentary review.
Should You Convert to a Roth?
Did you know that anyone – regardless of income – can convert a Traditional IRA or distributions from different types of employer retirement plans to a Roth IRA? When evaluating a conversion, consider whether you have enough personal liquidity to avoid withdrawals from a Roth IRA in the first five years. If you must make such withdrawals after converting, the earnings portion is taxable, and the full amount of the withdrawal may be subject to a 10% IRS penalty, unless an exception applies.
After consultation with your independent tax advisor, a financial professional1 can help you assess conversion strategies and compare Roth IRA choices. Call us at 866.586.4722 or email us for a complimentary meeting to explore the risks, benefits, and other considerations of converting your retirement plan to a Roth IRA.
1 Financial professional refers to Premier Wealth Advisors (PWA), Premier Relationship Advisors (PRA) and Financial Advisors (FA). PWA/PRAs primarily focus on a full suite of Premier products and services while FAs primarily focus on a full suite of Advance products and services. Both offer bank products through HSBC Bank (USA) N.A., investments and certain insurance products, including annuities, through HSBC Securities (USA) Inc. and traditional insurance products through HSBC Insurance Agency (USA) Inc.
Investment and certain insurance products, including annuities, are offered by HSBC Securities (USA) Inc. (HSI), member NYSE/FINRA/SIPC. In California, HSI conducts insurance business as HSBC Securities Insurance Services. License #: OE67746. HSI is an affiliate of HSBC Bank USA, N.A. Whole life, universal life, term life and health insurance products are provided by unaffiliated third parties and are offered through Insurance Agents of HSBC Insurance Agency (USA) Inc., which is a wholly owned subsidiary of HSBC Bank USA, N.A. Products and services may vary by state and are not available in all states. California license #: OD36843.
|Investment, Annuity and Insurance Products:|
|ARE NOT A BANK DEPOSIT OR OBLIGATION OF THE BANK OR ANY OF ITS AFFILIATES||ARE NOT FDIC INSURED||ARE NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY||ARE NOT GUARANTEED BY THE BANK OR ANY OF ITS AFFILIATES||MAY LOSE VALUE|
All decisions regarding the tax implications of your investment(s) should be made in connection with your independent tax advisor.
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United States persons (including U.S. citizens and residents) are subject to U.S. taxation on their worldwide income and may be subject to tax and other filing obligations with respect to their U.S. and non–U.S. accounts – including, for example, Form TD F 90–22.1 (Report of Foreign Bank and Financial Accounts ("FBAR")). U.S. persons should consult a tax adviser for more information.
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