No one wants to spend their golden years toiling away at their job. That’s why it’s vital to make sure you have enough money saved to enjoy that time of your life with leisure like vacationing, playing golf, and relaxing. And with tax season around the corner, people are looking for opportunities to keep and save every dollar they can.
Enter, the IRA. IRA stands for an Individual Retirement Account.
Unlike with a 401(k) retirement fund (an account you get through your employer), an IRA is a type of savings account with tax benefits* that you can open yourself.
The thing about IRAs that make it different from a normal savings account is that it is designed to be utilized for retirement by incentivizing long-term growth and penalizing early withdrawals.
Roth and Traditional IRAs
Traditional IRAs, also sometimes known as “original IRAs” and/or deductible “IRAs”, are one of the most common forms of retirement savings. Their popularity comes from how deposits are considered deductions from your overall income, therefore resulting in savings on your taxes and an increase in your yearly refund. The money you put into this IRA grows tax-deferred until eventual withdrawal.
Roth IRAs do not feature tax deductible contributions, but they do offer tax-deferred growth and compounding interest. Both types come with limits as far as what you can contribute annually, and those limits increase with age. Starting in 2019, if under age 50, your total annual contributions cap out at $6,000. Above age 50, the limit increases to $7,000.4
You can deposit money into these funds until the age of 70.5-years-old. In addition, a Roth IRA owner may keep contributing to the account after age 70½ if he or she still has earned income.3
With a traditional IRA, once money is withdrawn it will be taxed as income. Roth IRA withdrawals are tax-free. If withdrawals are made from either account before reaching the age of 59.5, they will be penalized by 10%. 1
The biggest difference between a traditional and a Roth IRA is when you pay income tax on the money you put in the account. Traditional IRAs give you the tax benefit up-front while Roth IRAs give you these benefits in the long-term.
There are some restrictions if you also have a 401k or similar employer’s retirement plan. In such cases, single IRA owners making more than $72,000 a year in income cannot take a deduction and married couples filing jointly cannot if making a combined income exceeding $119,000. 2
When deciding what type of IRA is best for you, it’s best to take into consideration how your taxes will be affected and what will be best for you in both the short and long term.
Considering that deposits you make into the traditional IRA funds are tax deductible, if your income places you into a higher tax bracket it would make more sense to utilize this type of an IRA. The money you deposit will result in immediate savings. Likewise, if your income is lower or you aren’t currently employed a Roth IRA may make more sense due to a lesser need for extra tax deductions.
With a traditional IRA, you pay taxes when the money is withdrawn, but is tax deductible when you put in. With a Roth IRA, it's the opposite; you'll pay income tax when you put the money into the account, but not when you take it out during retirement.
There are a number of specialized IRAs. These are slightly modified versions of traditional/Roth IRA types.
Simple IRAs: Simple IRAs are functionally traditional IRAs. They’re classified with a special designation because they’re designed for businesses with 100 or fewer workers. Employers also make contributions into this IRA fund, and the limit of contributions are twice that of traditional IRAs. 5
Spousal IRAs: While not a distinct IRA type in its own right, spouses that do not work and file federal taxes jointly can also make contributions to their spouse’s IRA fund. 1
Group IRAs: These IRAs are traditional IRAs, established by employers or unions and funded through trusts.5
Why Should I Have an IRA?
Even if you're putting money into your company's 401(k), you should still consider building a savings in an IRA for a few different reasons.
You can still make deposits into an IRA fund if you have a 401K.
Depending on the company you work for and the expense ratio of your plan, you may not be maximizing your saving possibilities by putting all your savings in one basket. By investing in an IRA, you have the ability to diversify, and save on taxes if you have both. What if you maxed out your 401(k) and still have money to save?
Putting that money into an IRA gives you even more opportunity to plan for retirement.
If you're interested in starting an IRA account, contact Ken Toops, Financial Advisor, for more information.
Florida Credit Union Investment Center
Located at Florida Credit Union
2831 NW 43rd Street
Gainesville, Florida 32606
*Neither SWBC Investment Services, LLC nor the financial professional provide tax advice. Please consult your tax professional for tax advice.
Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor. SWBC Investment Services, LLC & SWBC Investment Company are not affiliated with this institution. Funds should not be considered a deposit of or guaranteed by this institution, may lose value and are not NCUSIF insured.
Florida Credit Union is a full-service financial institution. Founded in 1954 as the Alachua County Teachers’ Credit Union, FCU now services over 100,000 members in 45 counties throughout North and Central Florida. For more information on the services we provide, visit FLCU.org or call us at 1-800-284-1144.