IRAs, or individual retirement accounts, are a great tool to help you reach your retirement goals. When you are planning your retirement, it is crucial to learn about the different types of savings accounts available to you and the benefits that having an IRA can bring. Here we’ve compiled some basic IRA information to help in deciding if an IRA is right for you!
Defining an IRA
IRAs are a common retirement savings tool in the United States and are offered by most financial institutions. Many employers even have systems in place where employees can easily contribute a set amount to their IRA savings each pay period!
Most people are only aware of Traditional IRAs and Roth IRAs, though there are many additional types. Some other common IRAs include Rollover IRAs, Inherited IRAs, and Custodial IRAs, and SEP IRAs.
Traditional IRA
- Contributions to a Traditional IRA may be tax-deductible.
- Traditional IRAs have no income limitations.
- Any withdrawals of pre-tax earnings or contributions are taxed like income during retirement.
Roth IRA
- Contributions to a Roth IRA are not tax-deductible.
- Roth IRAs do have some income limitations.
- Most withdrawals are both tax and penalty-free if you are over age 59 and 6 months, and if the account is over 5 years old.
Rollover IRA
- Rollover IRAs provide an alternative to a 401(k) that may provide more choices and require lower fees.
- Funds grow with a tax-advantage, even after transfer.
- Rollover IRAs require no taxes or penalties when you transfer the account.
Inherited IRA
- Inherited IRAs are only for individuals who inherited a Traditional or Roth IRA.
- Inherited IRAs are not eligible for tax-deductible contributions or IRA conversions.
- Account liquidation or annual distributions of the account balance is required within a pre-set period of time.
Custodial IRA
- Custodial IRAs can be a Traditional or Roth IRA, held by a parent for children under age 18 who earn income.
- Custodial IRAs may be used to pay for higher education expenses.
SEP IRA
- SEP IRAs are best for small business owners or those who are self-employed with few or no employees.
- SEP IRAs are entirely funded by the business owner, but policies are owned by the employees.
- Withdrawals from SEP IRAs are taxed as normal income.
Benefits of an IRA
Not only can IRAs help you reach your retirement savings goals, but they can also provide tax and income benefits. Interest on an IRA compounds year after year, which increases the amount of overall retirement savings drastically over a long period. Some IRAs may also allow you the choice to defer taxes on the money they are contributing or to have tax-free withdrawals later, so long as certain conditions are met.
Tax-deductible IRA contributions can also lower one’s adjusted gross income (AGI), which may affect your tax rate and how certain itemized tax deductions are calculated. If you already have more than one retirement account, you may be able to consolidate qualifying accounts into a new IRS to protect your retirement funds while still contributing to your future.
If you’re interested in learning more about IRAs and whether one could be right for you, give us a call at (888) 539-1633 to speak to one of our Life & Financial experts.
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We hope this information helps you in deciding if an IRA is right for you!
If you’d like to learn how we can help you plan your retirement, call Empower Brokerage to speak to one of our Life and Annuity experts at (888) 539-1633.
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