Individual Retirement Account
Background
For many people, an individual retirement account (IRA) is the best tool available to prepare for financial needs later in life. An IRA is an account that allows you to save for retirement while enjoying substantial tax advantages. IRAs allow you to choose from an array of investment choices, including stocks, bonds, ETFs, and mutual funds.
Traditional IRA
In a traditional IRA, taxes on contributions are deferred until you actually withdraw your money. Since most retirees withdraw IRA funds in lower tax brackets than they would have while working, this can amount to significant tax savings. Taxpayers may deduct contributions to a traditional IRA if they meet certain conditions. If either the taxpayer or spouse was covered by a work-provided retirement plan during the tax year in question, the deduction may be reduced, phased out, or eliminated, depending on filing status and income.
Traditional IRAs offer you a great deal of investment flexibility. They typically allow users to choose any investment option that is available in a standard investment account, including common or preferred stocks, bonds, mutual funds, certificates of deposit(CDs), and exchange traded funds(ETFs).
According to the IRS, for tax year 2024, you many contribute up to $7,000 annually into a traditional or a Roth IRA, and $8,000 if you are over the age of 50. Anyone with earned income may continue making contributions until the age of 70 1/2. Withdrawals prior to the age of 59 1/2 are penalized, so there is a built-in financial incentive to preserve your IRA funds until retirement. However, once you reach age 73 in 2024 or later you must take your first required minimum distribution by April 1 of the year after you reach 73. Taxes on capital gains, interest, and dividends are deferred, which makes IRAs more tax efficient than an after-tax account. You pay no taxes until funds are withdrawn.
"By failing to prepare, you are preparing to fail"
Benjamin Franklin
Roth IRA
A Roth IRA is a wonderful tool to add to your retirement savings plans. It is a program which, according to the IRS, allows you to put up to $7,000 per year in 2024 or $8,000 per year if you are 50 or older as long as you have earned income.
All money deposited into the Roth IRA is after tax, but if you generally wait until 59 1/2 and you have had the Roth IRA for 5 years, you will be able to withdraw all deposits tax free! Plus, you are not forced to begin withdrawals at 73. If you do not need the money until 85, it still grows tax free, and you can withdraw it tax free.
Also, if you are married and the other spouse does not have any earned income, you can still fund that spouse’s Roth IRA, giving your family two Roth accounts or double the tax free savings.