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Preparing yourself financially for retirement is among the most important goals for any worker or business owner. Even then, figures show that nearly half of all Americans have yet to start planning for retirement.
An Individual Retirement Account (IRA) is a popular way to save for retirement for those with an earned income. A lot goes into selecting the right IRA, but your community bank will be invaluable in helping you make a good decision.
Read on to learn more about IRAs.
IRA Types
The two main types of IRAs are traditional and Roth, each with its own tax benefits.
Traditional IRAs
In a traditional IRA, the amount you earn from your savings is tax-deferred. This way, you will pay taxes on your savings and investment earnings when you withdraw the money.
Roth IRAs
With Roth IRAs, the savings you contribute to your account must be pre-taxed. This means you must first pay tax on your income before contributing a certain amount to your retirement account. On the upside, you will not pay taxes on your savings and earnings when you withdraw the money at retirement.
Consider a traditional IRA if your income places you in a higher tax bracket. By deducting your IRA contributions pre-tax, you can minimize your income tax. A Roth account may be suitable if your savings might place you in a higher tax bracket at retirement.
IRA Investments
When you place money in an IRA account, your financial institution grows this money for you through various investment channels. As the account owner, you can choose how to invest your savings.
Common investment channels include bonds, stock markets, certificates of deposit (CD), money markets, and market index funds.
Your choice of investment depends on factors such as your age and tolerance for risk. If you have a long way to go before retirement, say over ten years, you might be able to afford investing in high-risk but high-return channels such as stocks or money markets.
Tools such as CDs and treasury bonds are safer investments, but they do not offer returns as high of returns as stocks or money markets. Investors closer to retirement may opt for such low-risk options.
IRA Eligibility and Contributions Limits
Both traditional and Roth IRAs have eligibility requirements based on factors such as your annual income amount, marital status, and whether you have work-related retirement plans.
For example, as of 2018, to be eligible for a Roth IRA, you must earn less than $120,000 as a single earner and less than $189,000 if you are married and filing for income tax jointly.
If you already have a workplace retirement plan such as a 401(k), you can contribute to a traditional account as long as your adjusted gross income is less than $63,000 for a single person or $101,000 for a couple filing jointly.
Whether you are eligible for a traditional or Roth IRA, the maximum annual amount you can contribute to your account depends on your age. The contribution limit is $6,500 for investors aged 50 years and above and $5,500 for investors below 50 years.
IRA Withdrawal Requirements
You can withdraw your savings and earnings from your IRA account at any time. However, making a full or partial withdrawal before you are age 59 1/2 will earn you a 10% tax penalty on the amount withdrawn. If you have a traditional IRA, you can no longer keep your money in the account upon reaching 70 1/2 years.
Financial experts recommend that you start saving for retirement as early as possible to ensure you have adequate funds in old age. While IRAs may seem complex, a little research and the guidance of a reputable adviser will go a long way.
At Unison Bank, we simplify retirement savings for you. Get in touch with us to learn more about our variety of IRAs tailored to meet your saving needs.
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