What You Need to Know About IRAs

You haven’t been living under a rock, so you’ve already learned that planning for retirement is one of the most important financial choices you will ever make. But, many people are still confused about their different options regarding retirement planning. You might know that an Individual Retirement Account (IRA) offers some tax advantages, but maybe that’s about it. What else do you need to know about IRAs, as you consider saving for your future?

You have two options: A Traditional or Roth IRA. Both types of IRA offer tax-related advantages, but they’re basically opposites of one another. With a Traditional IRA, you make contributions on a pre-tax basis. Your money grows free of taxes, and you don’t pay income taxes on it until you take withdrawals in retirement. These pre-tax contributions might also help to lower your income tax liability for the year.

With a Roth IRA, you make post-tax contributions to the account, so it doesn’t help you with income taxes now. However, you will enjoy tax-free income in retirement, as you take your withdrawals from the account.

You can choose the option that works best for both your current and (expected) future situations. Some people even fund both types of account.

An IRA might offer more flexibility than a 401k. 401k accounts are terrific retirement planning options, especially if your employer matches contributions. However, they can sometimes be a bit confusing. An IRA usually offers more diverse investment options, and the administrative fees are often easier to comprehend.

Withdrawals are flexible. You will still be required to take minimum distributions from your IRA by age 70 ½, as with other types of retirement accounts. But you aren’t limited to cash-only withdrawals. You could also opt to move investments out of the IRA and into a taxable account. This fulfills your distribution requirement while possibly avoiding transaction costs.

Your heirs can enjoy the benefits, too. In the event that you pass away before using the funds in your IRA, the account is transferable to your heirs. Just remember to communicate very clearly with them regarding their inheritance. Many beneficiaries make the potential mistake of cashing out the fund, because they don’t realize that the tax benefits associated with the account are available to them, too.

As you can see, IRAs are similar to 401(k) funds in some ways, while different in other ways. If you’re interested in opening an IRA, give us a call and we can discuss this option in further detail.