These days, most people understand how important it is to save for retirement. With Social Security on shaky ground and inflation looming over our heads like a threatening black cloud, the best way to ensure that you’re going to be able to retire in comfort is to take matters into your own hands. Many working people today are fortunate enough to have employers who offer company-sponsored 401(k) plans. However, those who are self-employed or work for smaller companies with minimal benefits might not have access to a 401(k) plan. For such people, the next best thing comes in the form of the IRA.
An IRA, or Individual Retirement Account, is a retirement fund that you can set up on your own without the involvement of an employer. There are two types of IRAs: traditional IRAs and Roth IRAs. Jim Barker of Barker Insurance Services explains that a traditional IRA works lets you contribute a certain amount of pre-tax money that can then be invested for the future. Traditional IRAs offer a significant tax benefit upfront in that any funds contributed to your retirement account are free from taxation for the calendar year in which they are earned. However, such amounts will then be subject to taxation once they are withdrawn at retirement. In other words, tax-wise, you’ll get to benefit today, but be aware that you’re bound to get hit in the future.
A Roth IRA works the other way around. With a Roth IRA, you are allowed to contribute a certain amount of after-tax money that is earmarked for your retirement. While the money you put away will be subject to taxation for the calendar year in which it’s earned, it can be withdrawn on a tax-free basis come retirement. Therefore, while you might not see any tax benefits today from a Roth IRA, this option allows you to essentially “pre-pay” your retirement tax burden and save yourself the hassle in the future.
Traditional and Roth IRAs also vary in terms of their withdrawal requirements. With a traditional IRA, you must start withdrawing funds by the time you reach age 70.5, whereas Roth IRAs do not come with mandatory distribution ages. Both traditional and Roth IRAs come with limitations as to how much money you’re allowed to put in each year. Those who are under 50 can contribute $5,000 to either type of IRA (or, if eligible, a combination of both). For people who are 50 or older, the contribution limit is $6,000.
Finally, income restrictions can affect your eligibility to open a Roth IRA. Only those who make less than $116,000 for a single person or $169,000 when married and filing jointly are allowed to contribute to Roth IRAs. Traditional IRAs, however, do not come with such income-related limitations.
If you’re serious about saving for retirement, then don’t wait to get started on funding your IRA. Ask your personal financial representative to help you decide whether a traditional or Roth IRA is right for you. Remember, by making wise choices today, you’ll be able to pave the way to the financially-stable future that you deserve.
