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It’s Never Too Early to Talk Retirement

on May 5 | in Issue 6, Money | by | with No Comments

Individual Retirement Accounts (IRAs) Explained

IRAs are an excellent retirement savings tool because of the tax advantages. There are two different kinds, each with different advantages:

  • Traditional IRAs
  • Roth IRAs

401kHowever, if you have the opportunity to enroll in a 401(K) plan, take it. Employers will often match a percentage of your contributions, which means free money. You will have a lower taxable income and you will accumulate savings without even thinking about it.

If you start contributing to a 401(K) plan when you are young, say in your twenties, you can end up with one or two million dollars (or more) in your account by the time you retire.

If your company does not offer a 401(K), an IRA is a great alternative—you can set it up independently and deposit money into it every year. You have many investment choices (stocks, bonds, mutual funds, CDs) that you can arrange and rearrange (if you don’t like their performance) as desired. IRAs do have lower contribution limits, though—but any retirement savings tool is better than nothing!

Traditional IRAs

  • iraAmount deposited may be subtracted from income for tax purposes (depending on income/marital status/401(K)/pension)
  • Annual contribution limits ($5,500 or $6,500 over 50)
  • Withdrawals begin at age 59 ½ and are mandatory by 70 ½
  • Taxes are paid on earnings upon withdrawal
  • No income restrictions—anyone can have one
  • Investment options—stocks, bonds, etc.
  • 10 percent penalty on all funds withdrawn before age 59 ½ unless an exception applies
  • Contribution deadline: April 15 for previous tax year
  • Minimum opening deposit as low as $250

Roth IRA

  • Amount deposited may NOT be subtracted from income for tax purposes
  • Annual contribution limits ($5,500 or $6,500 over 50)
  • Can withdraw the principal (not earnings) at any time without penalty (subject to minimal conditions)
  • Upon retirement, all withdrawals (earnings and principal) are 100 percent tax-free
  • Not everyone qualifies for a Roth IRA—it is necessary to earn below a certain limit when single or married. Check these levels with your financial advisor.
  • No mandatory distribution age—can be given as inheritance
  • Investment options—stocks, bonds etc.
  • Can be used in the event of disability, death, or first-time home purchase
  • Contribution deadline: April 15 for previous tax year
  • Minimum opening deposit as low as $250

There are a number of IRA calculators online that will give you an idea of your outcome dependent on contribution, etc.

A free consultation with your local credit union/bank representative or financial planner can clarify your choices and give you peace of mind to know that you have the best type of Individual Retirement Account (IRA) and contribution plan to suit your needs.

It is advisable to consult with your tax advisor regarding the deductibility of deposits and withdrawal restrictions on your IRA.

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