Most comprehensive retirement plans include some sort of employer-sponsored retirement plan such as a pension plan or a 401(k), especially if you can get an employee match. But your retirement strategy should also include your own personal savings plan such as an Individual Retirement Account (IRA). While you may feel retirement is still decades away for you, you should be saving for the inevitable today by using tax-advantaged accounts.
Individual Retirement Accounts (IRAs) are a crucial component to many retirement plans and come with tax advantages. There are two major types of IRAs available: Traditional and Roth. Different IRAs apply to different circumstances in your career and your financial plan and the advice of a financial professional is crucial in choosing the right one. Also, some income restrictions apply for contributions to IRAs.
- You don’t pay taxes on your earnings until the time you withdraw from your account.
- You can contribute up to $5,500 a year.
- Over age 50 “catch-up” provision allows you to contribute up to $6,500 a year.
- The ability to deduct contributions from your taxes depends on your filing status, adjusted gross income, and whether you’re considered an “active participant” in another account.
One of the drawbacks of a Traditional IRA is that you cannot make any more contributions during or after the year you turn 70½ years old. That same year, you must also start taking required minimum distributions from your account, but by starting to save now, withdrawals at that point shouldn’t be an issue.
- Contributions are made with after tax dollars.
- The contribution limits and “catch-up” provisions are the same as Traditional IRA.
- Earnings from a Roth IRA will not be taxed when you make qualified withdrawals, provided you have reached age 59 ½ and have held the account at least five years.
- Contributions are not tax deductible.
- There are no age limits on contributions.
- No required minimum distributions, however restrictions on distributions do apply.
The Roth IRA and the Traditional IRA both share many of the same qualities. But even the slightest differences can impact your entire financial plan when deciding which IRA is best for you.
Comprehensive retirement plans typically emulate a three-legged stool that consist of Social Security, some sort of employer involved retirement plan such as a pension plan or a 401(k) and your own investments and savings such as IRAs. Unfortunately Social Security isn’t a guarantee that should be relied on, and employer-sponsored plans are subject to change. Which is why your personal savings is extremely important, and we want to help you make the most of the benefits available through tax-advantaged retirement accounts. We can assist you in evaluating all your retirement saving choices. We’re happy to work in conjunction with your tax professional to help you solidify the foundation for a strong financial plan.
The above material was prepared by Securities America, Inc.