Individual Retirement Account (IRA)

An IRA is an Individual Retirement Account. You can place a certain amount of income each year into an IRA and grow that money tax-deferred. IRAs are not employer-sponsored retirement plans like 401(k)s, and as such, they can give you a greater variety of investment choices.

How does an IRA work?

Unlike employer-sponsored retirement plans like a 401(k), you can open an IRA by yourself. There are three common types of IRAs: a Traditional IRA, a Roth IRA, and an SEP IRA, though more variations exist.

  • A Traditional IRA allows you to invest your pre-tax income, deferring taxation until you start tapping into the funds in retirement.
  • Roth IRAs work in the opposite way: they allow you to invest taxed income, which can be withdrawn in your retirement without being taxed.
  • A Simplified Employee Pension (SEP) IRA is similar to a traditional IRA, but is used by business owners to make contributions for themselves and eligible employees.

Benefits of an IRA

Traditional IRAs allow your pre-tax contributions to potentially grow and compound faster by delaying taxes until you actually withdraw the money during retirement. Don’t overlook this benefit: you may be in a lower tax bracket in retirement, allowing you to save more of your money into your golden years. But consider, too, that tax rates may rise in the future.

Roth IRAs can make it easier to plan your retirement, as you’ll be able to see exactly how much you have available in liquid assets. With no complicated tax calculations to figure out, plotting out your retirement budget can be an easier task.

Risks of an IRA

There are limits to how much you can contribute to your IRA, and you could face a 10% tax penalty if you withdraw before you’re 59 ½ years old (although there are some exceptions that allow you to withdraw funds early without penalty, including if you withdraw the money for medical expenses and insurance, higher education expenses, or to buy your first home).

IRA considerations

You’ll want to consider which type of IRA makes sense for you. Do you stand to benefit from growing your money tax-deferred in a traditional IRA, or would you rather withdraw your money tax-free in retirement from a Roth IRA? Or, if you own a business, does it make sense to use a SEP-IRA? Consult a qualified tax advisor to discuss your options.

If you’re looking for a consistent source of guaranteed income from your IRA monies, you may consider using a qualified annuity. However, be aware that moving your IRA into a non-qualified annuity, would be treated as a taxable withdrawal, which could result in a big hit to your retirement nest egg.

As you consider guaranteed income sources for retirement, you might want to schedule a retirement income checkup to discuss what your next steps might be to plan your retirement income.

Annuities are insurance products backed by the claims-paying ability of the issuing company; they are not FDIC insured; are not obligations or deposits of, and are not guaranteed or underwritten by any bank, savings and loan or credit union or its affiliates; are unrelated to and not a condition of the provision or term of any banking service or activity. Annuities may be subject to fees and or surrender charges, which vary by product.This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation. The presenters of this information are not associated with, or endorsed by, the Social Security Administration or any other government agency.