You’re envisioning a relaxing, rewarding retirement – but have you equipped yourself with the tools needed to get there?
If a tax-advantaged, practical approach to saving for your future sounds appealing, an Individual Retirement Account (IRA) could be right for you. This article takes a deep dive into the importance of an IRA – what it is, why you should have one, and more.
What is an IRA?
With names like 401(k), 403(b), SEP and IRA, it can be hard to keep the different retirement savings options straight.
While some retirement accounts are offered as a benefit of working for a company, an IRA is available for anyone with earned income. IRAs are owned and funded by the individual – hence the name individual retirement accounts.
Therefore, instead of opening the account through your employer, you can open an IRA through a bank, a broker, or an investment company.
Why Should I Open an IRA?
One of the biggest advantages of an IRA is that it allows you to grow and compound your money on a tax-free or tax-deferred basis. Also, an IRA is known for offering more investment choices than employer-sponsored plans.
Another benefit to this method of saving for retirement is that there is an IRA option to suit almost any situation – more on that below.
Because IRAs – like other retirement accounts – are intended for long-term savings, early withdrawal usually means a hefty penalty of 10% of the amount withdrawn. However, with an IRA it is sometimes possible to avoid withdrawal penalties on certain expenses such as higher education, purchasing your first home, or health insurance if you’re self-employed. Also, IRA’s will require that you take a distribution every year after you turn 70 and a half.
An IRA is one of the many tools that can help put you on the path toward financial wellness. Financial vehicles such as an IRA can influence investors to create and stick to a budget, as well as develop a long-term plan for saving – two key factors in successful financial management. You’re sure to experience less financial stress with a sound retirement savings plan in place.
What are the Different Types of IRAs?
There are three main types of IRAs and each one has its own rules regarding contributing, withdrawing, and taxing. When determining which IRA option might be right for you, you’ll want to take into consideration your income, tax bracket, preferred potential tax savings, and more.
Traditional IRA: Contributions to a traditional IRA are commonly tax deductible, allowing you to have a tax break up front. Once you hit retirement and start making withdrawals, however, you’ll be taxed at your ordinary income tax rate on your traditional IRA savings.
Roth IRAs: Unlike traditional IRAs where your tax break is on the front end, contributions to a Roth IRA are not tax deductible. After contributing income you’ve already paid taxes on, once you hit retirement you can enjoy tax-free withdrawals with a Roth IRA.
Rollover IRAs: A rollover IRA can be a good option when you have eligible assets to transfer from an employer-sponsored retirement plan into an IRA. Using this method to “roll over” your funds can help keep the tax-deferred status of your money and prevent early withdrawal fees.
Can I Have More than One Retirement Account?
The short answer is yes.
In fact, many experts consider it wise financial advice to have multiple accounts in order to effectively save for retirement. There is no limit to the number of IRAs you can have – however the Internal Revenue Service (IRS) does put a limit on the total contribution amount you can make across all accounts.
You can also have an IRA alongside an employer-sponsored account, such as a 401(k). However, it’s possible to lose out on tax advantages normally associated with an IRA if your income exceeds a certain amount determined by the IRS.
How Can Sunrise Banks Help You Save for Retirement?
At Sunrise Banks, we know how hard you’ve worked and how much you’re looking forward to retirement.
That’s why we help you prepare for this exciting milestone by offering both Traditional and Roth IRA savings accounts. Taking into consideration your specific financial situation, we can help you weigh your options and choose an IRA that works best for you.
Note: IRAs are not FDIC insured, not guaranteed by the bank and may lose value.