Retirement is the ultimate goal. So, planning ahead is incredibly important. Most individuals understand that they need to start saving early and the most common, and easiest way, to save is through employer sponsored plans such as a 401k or 403B. That being said, only some US companies offer such retirement plans. That means many employees have to start taking the initiative to plan for their retirement on their own.
If you’re not contributing to an employer sponsored plan, one of the most popular options for retirement savings is an individual retirement account – commonly referred to as an IRA. There are multiple ways to invest in an IRA, including many different types of assets such as stocks, bonds, and even real estate.
So, let’s break down the two types of IRA’s -- Roth and Traditional. Each option comes with its own unique tax benefits so it’s critical to know the how the two differ to find the best fit your investor profile.
First, contributions to a traditional IRA may be tax deductible, and the funds grow tax free until you start making withdrawals during retirement. At that time, the funds will be taxed. Traditional IRAs are popular among clients that currently have a high salary with few tax deductions. These individuals often expect to be in a lower tax bracket during their retirement years.
Secondly, Roth IRAs are made up of after-tax contributions. This means you don’t get the immediate tax deduction, but the funds that you invest grow tax free. Then, when you reach retirement age and begin to make withdrawals, they are all tax free.
One of the most common questions that I receive “is how much you can contribute to an IRA?” For the current year, the contribution limit is $6000 and $7000 for anyone over the age of 50.
If you’re curious about opening an IRA, you may be qualified if you have earned income and you or your spouse doesn’t participate in an employer sponsor plan. In that case, you can put money into a traditional IRA regardless of your income amount. If you or your spouse does have an employer sponsored plan, then there will be a contribution limit.
IRAs are a great way to save for retirement and I’ve only scratched the surface of all of the options and details today. I’m always available for a complimentary consultation to discuss your unique circumstances and find out more about how a Traditional or Roth IRA might fit into your financial plan.