Ben Franklin once said, “In this world, nothing is certain but death and taxes.” That might be true, but Ben wasn’t able to open an IRA back then. If he had this option, he might have felt a little more lighthearted about paying the tax man.
Individual Retirement Accounts (IRAs) are great for people looking to save money on their tax bill and boost their retirement savings at the same time. In this volatile economy, saving money is more important than ever. Plus, when the stock market is down, it could be a good time to invest.
If the IRA world confuses you, don’t worry. You are definitely not alone. Many of my clients felt intimidated when we first start discussing the subject of retirement or taxes. Here’s a quick explanation of what an IRA is and what it can do for you.
An IRA is a retirement account you control. With an IRA, the contributions you make can grow tax deferred until you start receiving distributions when you retire. There is a yearly limit on the contributions you can make, but if you’re age 50 or older, you are allowed to make extra “catch-up” contributions.
Many people mistakenly believe they can’t have an IRA if they participate in an employer-sponsored plan like a 401(k). The truth is, you can do both. And considering that Social Security likely won’t be enough on its own and people are living longer in retirement, I encourage you to take advantage of several options.
All these options can be taxing
The two most popular types of IRAs are Traditional and Roth. Both offer unique benefits to a person saving for retirement. Consider the Traditional IRA if you’re looking for a break on your tax return this year. That’s because you might be able to deduct contributions you make to this account from your federal taxes if you are eligible.
Whether you can take a deduction depends on a few factors. For example, if you earn too much income, or already participate in a 401(k) or similar employer-sponsored retirement plan, you might not be able to deduct Traditional IRA contributions from your income.
The Roth IRA is a good alternative for people who cannot make deductible contributions to a Traditional IRA. With the Roth IRA, the tax break is on the back end. You cannot deduct the contribution, but earnings grow income tax free and withdrawals at retirement are normally tax free. However, there are income limits, so check with a professional to make sure you are eligible to contribute to a Roth IRA.
It’s easier than you might think
You can afford an IRA, no matter where you are starting from. You can open an account with very little up front. If you’ve changed jobs recently and still have money in an old 401(k), you can roll that money into an IRA without having to pay any penalties. This is very popular. About half of all IRA savings started out in employer-sponsored plans.
You can also sign up for an automatic investment plan, which allows you to have regular deductions made from a checking account. These types of plans are great for people who don’t want to make one large contribution every year.
No matter what option is best for you, getting help from a trained professional is essential. Don’t wait. The longer you go without a plan, the less money you’ll have to enjoy in retirement. Need help? Call me Sean Marler at 782-8363.