Starting to plan for retirement? One of the best ways to save for retirement is with an IRA.
Financial experts chimed in to share why they would choose an IRA for their retirement savings.
IRAs Are A Great Savings Vehicle
Russ Thornton, Retirement Planning for Women, says, “IRAs are a great retirement savings vehicle for many. In addition to providing virtually unlimited investment flexibility with an IRA account, your dollars in an IRA grow tax-deferred. This means you don’t have the added friction and costs of taxes on dividends, interests, or realized capital gains on investments held within an IRA account.
And depending on your situation, you may be able to deduct money contributed to an IRA from your income taxes up to a certain amount.
Finally, Roth IRAs also improve on regular IRAs, in addition to tax-deferred growth (like a traditional IRA). You can withdraw money from a Roth IRA completely tax-free. The growth above and beyond your original contributions in a regular IRA are taxed as income in the year a withdrawal is made.
There are other specifics and requirements involved with IRA accounts, but in virtually all situations, IRAs are a great tool for your retirement plan.”
She says, “Money contributed to an IRA is tax-free until you withdraw or are forced to through RMDs. Unlike other retirement accounts, IRAs can be created easily online with any brokerage company. IRAs can give investors to pick their investments without the regulation of having to only select certain portfolios.
IRAs are a great starting point for investing for your retirement as they are fairly simple to open and operate similar to a taxable brokerage account. In addition, anyone can open an account and contribute if you have earned income. Therefore, it will not hurt you to open an IRA account. However, mistakes may come when contributing and allocating your money.
Someone who is considering contributing to an IRA account should consider whether they want to be taxed now or later. An investor’s tax bracket, retirement vision, and age will help determine whether or not an IRA is a good fit. Be careful about overfunding your IRA account each year to avoid penalties.
He outlined six reasons why he recommends choosing an IRA.
1. IRA stands for “Individual Retirement Arrangement” and is a type of savings vehicle designed for retirement savings. IRAs are tax-deductible (in the case of a Traditional IRA) or tax-free (in the case of a Roth IRA). Both are tax-sheltered for the life of the account. This means that no matter how often you update your investments or buy and sell, you will not be charged capital gains tax on the trades.
The IRA account is 100% sheltered from capital gains. With a traditional IRA, the tax deduction can lower your taxable income. In the case of a Roth IRA, there is no tax deduction, but the growth is tax-free, and withdrawals at retirement are not subject to income taxes. These tax-saving features make IRAs a great vehicle for saving for retirement.
2. Best Practices. First, be sure to get familiar with income brackets, how they affect your eligibility for IRAs, and how the option of a workplace retirement plan can affect your ability to take advantage of an IRA. For example, suppose your income is over a certain amount, and a workplace retirement plan covers you.
In that case, you may not be eligible for a tax deduction when contributing to an IRA. In the case of a Roth IRA, the income limits are higher, but once you reach a certain threshold, you are no longer eligible to contribute directly to a Roth IRA. To see your limits for any given year, search for “IRA income limits YYYY” using the year you want to see the limits for.
3. In some instances, it’s possible to (legally) circumvent the limits on Roth IRAs if your income is over the allowed threshold. You can accomplish this with a “Backdoor Roth IRA.” This is an option only if you do not have any funds in Traditional IRAs that year. The Backdoor Roth is performed by contributing to a Traditional IRA and then converting it to a Roth IRA. A Backdoor Roth can come with lots of nuances and important details, so it’s best to consult a professional before attempting this.
4. IRAs can be a great first option for many saving for retirement. Of all the account types, it is often the easiest to open and manage and is 100% portable because it is assigned to you as an individual (not tied to an employer plan). In addition, though IRAs limit the amount you can save in a given year, they have a lot of flexibility, and the tax sheltering features are very attractive.
5. It’s important to note that IRA do have penalties for early withdrawal. In both Traditional IRAs and Roth IRAs, you may incur a 10% penalty if you withdraw the funds before age 59 1/2 (with some exceptions).
6. IRAs have some additional perks, as well. You can withdraw up to $10,000 from a Traditional IRA for a first-time home purchase with no penalty. You will only owe income tax on the withdrawal. In the case of Roth IRAs, you can withdraw the “basis” (the amount you have contributed) penalty free at any time. Only the growth is subject to early withdrawal penalties.
Planning for Retirement
It’s never too early to start planning for retirement. Whether you can save $5 a month or $300 a month, it is important to have a good retirement plan in place.
Hi! I am a millennial mom with a passion for personal finance. I have always been “into” personal finance but got inspired to start my blog after a period of extended unemployment. That experience really changed the way I viewed my relationship with money and the importance of accessible personal finance education.