Saving for Retirement Through IRAs

Millions of working Americans have access to work-based retirement savings plans, such as a 401(k) through their employers. But more than 70 million workers do not, in which case, an Individual Retirement Arrangement, also known as an IRA, is a great way to save for retirement.

Here’s what you need to know about IRAs:

IRA Basics:

  • An IRA is an account you open at a financial institution. You typically need anywhere from $100 to $1,000 as an initial deposit to open the account.
  • You can contribute up to $5,500/year, or $6,500/year if you are age 50 or over.
  • You can choose among investment options offered by different financial institutions. Typically, banks offer certificates of deposit (CDs) or money market funds. Other institutions, like brokerages, life insurance companies and credit unions, offer stocks, bonds, mutual funds, exchange traded fund, and other options.
  • When choosing investments, be sure to consider how fees on your accounts will impact your investment gains. For example, Index funds, which are designed to track a specific group of stocks, are passively managed and therefore generally have much lower fees than actively-managed funds, that are managed by financial professionals.
  • To ensure saving, you should establish regular, automatic contributions. You may be able to set up a payroll deduction; otherwise, you can set up an automatic payment from your regular bank account.

Traditional and Roth IRAs:

You can choose between two types of IRAs— a Traditional or a Roth. The basic difference is in the taxation of your contributions and earnings.

  • Your contributions to a Traditional IRA are tax deductible. When you withdraw them at retirement, you will pay ordinary income taxes on what you contributed and on your investment earnings. You will likely be in a lower tax bracket by then.
  • With a Roth IRA, your contributions aren’t tax deductible when you make them, but you pay no tax on your withdrawals (including investment earnings) in retirement.

The following is a general comparison of Traditional and Roth IRAs: 

  Traditional Roth
Who’s eligible? Workers under age 70½ with earned income and nonworking spouses, up to a limit. Workers and nonworking spouses
of any age but income limits apply.

 

 

 

How much you
can contribute?
$5,500 a year
$6,500 a year if you’re 50 or over
Excess Contributions are taxed at a rate of 6%.
$5,500 a year
$6,500 a year if you’re 50 or over
Excess Contributions are taxed at a rate of 6%.
How are contributions taxed? Contributions are tax deferred; you pay taxes on your contributions and investment gains when you withdraw
them in retirement. If you also participate in a 401(k)-type plan, your contributions may be taxable.
Contributions are taxable, but
you pay no taxes on investment
earnings when you withdraw them
in retirement.
Withdrawal rules Can begin withdrawing after you reach age 59½; before then you’ll pay a 10% penalty and ordinary income taxes.
Must begin minimum required withdrawals at age 70½. You will face a 50% penalty for not taking required
minimum distributions each year after that.
Withdrawals of contributions are tax-free. Can begin withdrawing investment earnings after age 59½ as long as you’ve held the account at least five years. No minimum required withdrawals

For more detailed information and updated contribution limits, please visit the IRS website by clicking here

Both Traditional and Roth IRAs have exceptions to the withdrawal rules. For example, you can withdraw money, penalty-free, from your Traditional IRA for the following reasons: 

  • College expenses
  • First-time home purchase (up to $10,000)
  • Certain medical expenses
  • Total and permanent disability
  • If you’re a reservist called to active duty
  • You inherit an IRA
  • You are receiving distribution in the form
    of an annuity

If you own a Roth IRA, you can withdraw money tax-free for any of these purposes at any time. However, you will still have to pay ordinary taxes on your withdrawal from a Traditional IRA. 

Rollover IRAs
If you have a 401(k)-type plan from a prior job, you have several options on how to manage those assets.

  • You can leave the account, and assets, with the old employer – unless the account balance is under $5,000 – withdraw the assets, which is not a good idea as you will be subject to tax penalties, or roll it into what’s called a Rollover IRA.
  • You can open a Rollover IRA the same way you’d open a new IRA. And, if you get a job where a 401(k) type plan is offered, the assets in the Rollover IRA can be transferred into the employer plan.
  • All IRAs can be rolled over, but because of the Roth IRAs tax-deferred status, there can be implications when filing your taxes. You should talk to a tax professional if you are considering rolling over a Roth account into a 401(K) or Traditional IRA.

Take Action!

  • Make a plan for your retirement. Be specific and set realistic goals to help make retirement attainable. 
  • If you don’t have access to a work-based retirement plan, an IRA is your next best option. Open one today through a bank or other financial institution.
  • Understand the investment options available and consider which are right for you before opening your account. Decide which type of IRA will provide you with the most retirement income using a free and easy calculator, like the one provided by  www.bankrate.com – click here to use the calculator. 
  • If you are self-employed, consider a SEP-IRA, which offers higher contribution levels. For more information: please refer to the article here.

 

 

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