Answer These 3 Questions to Find the Right IRA for You
One of the most effective ways to boost your retirement savings is to regularly contribute to an IRA. Even if you’re already contributing to your 401(k) or other employer-sponsored retirement plan, an IRA can offer an additional level of tax-advantaged savings.
However, there are multiple types of IRAs to choose from. Each has its own unique benefits and considerations. If you’re not familiar with IRAs and how they work, it may be difficult to choose the one that’s right for you.
Choosing the best IRA for you really depends on your goals and needs. Below are three questions about your retirement income and what you’d like to accomplish. Ask yourself these questions, and the answers should guide you in the right direction.
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1. When do you want favorable tax treatment?
One of the most appealing aspects of an IRA is it allows you save for retirement income in a tax-advantaged manner. However, the two most popular IRAs—the traditional and the Roth—provide those tax benefits in different ways.
With a traditional IRA, you may get a deduction when you make a contribution to the account. Your money then grows tax-deferred as long as it stays in the IRA. You pay income taxes when you withdraw the money.
In a Roth IRA, there is no upfront deduction for your IRA contributions. Like the traditional, you don’t pay any taxes on growth while the money is in the IRA. As long as you wait to age 59 ½ to make a withdrawal, there aren’t any taxes when you pull the money out.
Simply put, the traditional IRA gives you a tax benefit today. The Roth IRA gives you a tax benefit in retirement. If you think your taxes will be higher in retirement than today, you may be better served by a Roth IRA.
2. Could you need early access?
In both IRAs, you are supposed to wait until age 59½ to take a withdrawal. If you take a withdrawal earlier than age 59½, you could face taxes and early withdrawal penalties.
However, the Roth IRA has a bit more leniency than the traditional. In the traditional, you usually face the penalty on your entire withdrawal amount. In a Roth, you only pay the taxes and penalties on the investment growth. You don’t pay any taxes or penalties when you withdraw your original contributions.
3. How much money do you make?
If you’re a high earner, there may be no decision to make. You may be forced to use a traditional IRA. You can always contribute to a traditional IRA no matter how much money you make. You may not be able to deduct your contributions if your income exceeds a certain level, but you can still make the contribution.
In a Roth IRA, you may not be able to contribute at all if your income exceeds a certain threshold. In 2016, if you are single, you start getting phased out of Roth IRA eligibility once your annual income hits $117,000. If you are married, that number is $183,000.1
As a single person, you are completely ineligible for Roth contributions if your income is $132,000 or more. You become ineligible as a married person if your income exceeds $194,000. If your income is above these levels, a traditional IRA may be your only option.1
Still not sure which IRA is right for you? Or ready to get started with your IRA savings strategy? We welcome an opportunity to help you develop an income savings course of action that helps you enjoy a long and rewarding retirement.
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