Michael Reynolds, financial planner at Elevation Financial, is making the case for one of the most accessible tools available for retirement planning: the Individual Retirement Arrangement, or IRA.
Reynolds has laid out six key points explaining why he believes IRAs deserve a central place in most people’s retirement strategy.
What an IRA Actually Is
An IRA is a savings vehicle specifically designed for retirement.
Depending on the type chosen, it offers different tax advantages: contributions to a Traditional IRA are tax-deductible, while Roth IRA contributions are made with after-tax dollars but grow tax-free.
Both account types are tax-sheltered for as long as the money remains in the account, meaning investors can buy and sell within the account without triggering capital gains taxes on those trades.
With a Traditional IRA, the upfront tax deduction can reduce taxable income in the year it’s made.
With a Roth IRA, there’s no immediate deduction, but qualified withdrawals in retirement, including all investment growth, are not subject to income tax.
Because of these features, IRAs remain a popular option for retirement savings.
Know the Rules Before You Contribute
Before opening an IRA, Reynolds recommends understanding how income affects eligibility.
Workplace retirement plans can complicate the picture: if your income exceeds a certain level and you’re also covered by an employer-sponsored plan, you may lose the ability to deduct Traditional IRA contributions.
Roth IRAs have their own income ceiling; above a certain threshold, direct contributions are no longer allowed.
Because these limits change from year to year, Reynolds suggests searching “IRA income limits” along with the relevant year to find current figures.
The Backdoor Roth Option
For higher earners who exceed the Roth IRA income limits, there may still be a legal workaround known as a “Backdoor Roth IRA.”
This strategy involves contributing to a Traditional IRA and then converting those funds into a Roth IRA.
It’s only available if you don’t hold any other funds in a Traditional IRA that year, and Reynolds notes that the process involves several nuances, making it best undertaken with the help of a financial professional.
Simplicity and Flexibility
One of the biggest advantages of an IRA, according to Reynolds, is how easy it is to open and manage.
Unlike employer-sponsored accounts, an IRA belongs entirely to the individual, making it fully portable regardless of where you work.
While annual contribution limits apply, IRAs still offer considerable flexibility and tax benefits, making them a strong entry point for many retirement savers.
Understanding Early Withdrawal Penalties
Both Traditional and Roth IRAs come with a catch: withdrawing funds before age 59½ typically triggers a 10% early withdrawal penalty, though some exceptions apply.
Lesser-Known Perks
IRAs also include a few notable exceptions to those penalty rules.
Account holders can withdraw up to $10,000 from a Traditional IRA penalty-free for a first-time home purchase, though ordinary income tax still applies to that withdrawal.
Roth IRA holders have even more flexibility: the “basis,” or the total amount originally contributed, can be withdrawn at any time without penalty. Only the account’s investment growth remains subject to early withdrawal penalties.
Read More:
- 5 Retirement Mistakes To Avoid for a Stable Retirement
- The $19,000 Tax-Free Strategy Baby Boomers Can Use To Help Younger Generations
- Frugal People Share the Best Items To Buy That Are Worth Every Penny (Even Though They’re Cheap)
