Individual Retirement Accounts (IRAs)

Are you saving enough for retirement?

As life changes, we’re here to help you reach your retirement savings goals.  We offer a full range of retirement solutions and guidance to match your needs.  Whether you are counting the months or years until you retire, these investments will help you become ready for whatever excitement awaits you.  An IRA is a personal individual account that will supplement an employer’s retirement plan or can be a stand-alone retirement plan.

What is an Individual Retirement Account (IRA)?

It is an account designed to help you save for retirement that offers many tax benefits and growth that compounds over time.  One huge benefit is that you can delay, or possibly eliminate, paying taxes on your investment earnings (which is the interest or dividends paid to your IRA), depending on the type of IRA you invest in.  This allows you to take advantage of compounding (interest earned is added to the invested amount, which increases the total funds you earn interest on) which helps build your savings as you’re working toward retirement.

Traditional IRA vs. Roth IRA

There are two types of IRAs from which to choose, depending on your financial situation, how much you earn and your retirement goals.  Below is a comparison of the two types.

 

 

Traditional IRA

Roth IRA

Tax Advantages Tax-deferred earnings: Offers a tax benefit now as your contributions may be tax deductible. Tax-free earnings: Offers a tax benefit later, as the withdrawals may be tax-free in retirement.
Eligibility* You must have earned income equal to or greater than your contribution.
  • No maximum income limit.
  • You must be under age 70 ½.
You must have earned income equal to or greater than your contribution.
  • Your modified adjusted gross income must fall within the limits prescribed by the IRS.
Maximum contribution allowed by law
  • $5,000 for tax years 2011 and 2012 ($6,000 if you’re age 50 or older).
  • $5,000 for tax years 2011 and 2012 ($6,000 if you’re age 50 or older)
  • The maximum Roth contribution depends on your income.
Advantages
  • Earnings grow tax-deferred until you take the money out, at which time it will be taxed as ordinary income.
  • Delaying the taxes on your contributions or earnings helps your money grow faster over time.
  • You can deduct your contributions if you do not participate in a retirement plan at work, or if you do, you meet the income requirements. This can reduce your current taxes which can leave you with more money to save.
  • Can be used to roll over assets from 401(k)s or other pre-tax employer-sponsored retirement plans.
  • Combining all of your various retirement accounts into one account can make it easier to keep track of your retirement assets.
  • Earnings grow tax-deferred until you take the money out, at which time it will be income tax free, if certain requirements are met.
  • More of your money is available to spend in retirement.
  • Contributions are not deductible, however they may be withdrawn at any time free of tax or penalty. This gives you access to the funds should the need arise.
  • Unlike a Traditional IRA, there are no required minimum distributions (RMDs) with a Roth. This means you can leave your money invested beyond age 70 ½ which allows your money to grow throughout your lifetime.
Disadvantages
  • At age 70 ½ you are required to begin taking minimum distributions (RMDs) and are no longer eligible to make contributions.
  • Contributions are made with after-tax dollars, so there is no immediate tax benefit.
  • Eligibility to make contributions is limited by income, so not everyone is eligible.
Penalty for early withdrawal**
  • 10% federal penalty tax on withdrawals before age 59 ½ unless an exception applies.
  • Distributions from contributions are penalty- free.
  • 10% federal penalty tax on withdrawals of earnings before age 59 ½ unless an exception applies.
Contribution deadline Generally, April 15 of the following year for any given tax year. (For tax year 2011, the deadline is April 17, 2012). Generally, April 15 of the following year for any given tax year. (For tax year 2011, the deadline is April 17, 2012).
What’s right for me?

Traditional IRAs can be a good choice:

  • If you qualify for a current tax year deduction and think you will be in a lower tax bracket in retirement.
  • If you also have one or more 401(k) plans with former employers or other retirement plans and want the simplicity and control from consolidating your accounts.
Roth IRAs can be a good choice:
  • If you will be in the same or a higher tax bracket in retirement.
  • If you have many years until retirement or if you plan to pass your IRA on to your heirs who also get the benefit of tax-free income.
*If you’re married and filing a joint income tax return, your nonworking spouse may also contribute to an IRA. The total contribution for both spouses cannot exceed the income of the working spouse for the contribution year.
**Qualifying exceptions: Distributions received before you’re 59 ½ may not be subject to the 10% federal penalty tax if the distribution is for a first-time home purchase (lifetime maximum, $10,000), postsecondary education expenses, substantially equal periodic payments taken under IRS guidelines, certain medical expenses exceeding 7.5% of your adjusted gross income, an IRS levy on the IRA, health insurance premiums (after you have received at least 12 consecutive weeks of unemployment compensation), or your disability or death.