Saving for your future starts today, and an IRA can help you put your best foot forward when you’re ready to retire.
What is an IRA? IRA stands for “Individual Retirement Account,” and it’s a great tool to help save money for retirement. Put simply, an IRA is a special, high-interest savings account, where contributions are either pre-taxed or tax-deferred allowing you to get the most out of your hard-earned nest egg.
An IRA also works alongside a 401k to ensure that, when you’re ready, you have the support you need to enjoy retirement to the fullest. And don’t worry about choosing one over the other – financial advisors often recommend contributing to both and IRA and a 401k to ensure a stable financial future.
Many workplaces allow you to make automatic contributions to an IRA, or you can add one to your retirement portfolio through a financial institution. Either way, you’ll want to make regular contributions, as anything in an IRA will accrue tons of interest over time.
Want to estimate how much you’ll need for retirement? Check out our savings calculator.
Different Types of IRAs
If you research IRAs, you’ll quickly find that there’s more than one type. You may find yourself asking, “What’s the difference between a Roth and a traditional IRA?” Never fear, First Merchants is here to guide you through the pros and cons of each.
A traditional IRA is a high-yield savings account with taxes deferred. This means you do not have to pay taxes on any money placed in the account until you withdraw funds after retirement.
While it may sound like this would result in less cash-on-hand, it can actually result in more funds, as many retirees are in a lower tax bracket than while they were working. So, a taxed deferred account can actually be subject to fewer taxes than a pre-taxed IRA. However, this is not a guarantee – so you should consult with a banker or financial adviser to see if this is the best option for you.
What is a Roth IRA?
A Roth IRA is a high-yield savings account where contributions are taxed before they’re put into the account. Unlike a traditional IRA, a Roth IRA means you pay taxes upfront, instead of later down the line. This can be good news – it means when you withdraw money for retirement, you will not have to pay any taxes on the amount as earned income.
However, if you’re in a high tax bracket while making contributions, you could be facing deep cuts to the amount that actually lands in your IRA.
What is a Rollover IRA?
A rollover IRA is what happens when you move money from one retirement fund – such as a 401k, or even another IRA – into a new IRA. It’s a simple, safe place to reallocate funds so that they can be rolled into a traditional or Roth IRA.
Typically, you have to be retired, or be of a certain age, before you can withdraw funds from your IRA. Withdrawing money too early can result in up to a 10% penalty and an additional “fine” on your taxes. Plus, you’ll be cutting into your retirement savings – so many financial experts advise against early withdrawal.
However, there are a few scenarios where withdrawing from your IRA or 401k is allowed. These are called “hardship withdrawals,” and cover situations where you may need a lump sum of cash, fast – such as if you are making the down payment on a house, encounter a large, unforeseen medical bill; or are the survivor of a natural disaster.
In these instances – and a few others – the Internal Revenue Service (IRS) will waive the 10% penalty and allow an early withdrawal. Just be aware that the funds will still be subject to income tax.
Since there’s such a steep penalty if the withdrawal does not meet the criteria for a hardship, you’ll want to make absolutely certain you qualify. You can visit one of our banking centers to find out more information, or learn more about hardship withdrawals on the IRS’s website.
There are many reasons to contribute to an IRA – but one you may not realize is that it can give you some extra cash back on your taxes. IRA contributions can be marked on your tax forms as a deduction if made during the tax year or before Tax Day, which this year is April 18, 2022.
While annual IRA contributions cap out at $6,000, that can still be a pretty penny in your pocket – so don’t miss out on this easy way to save even more.