Is an IRA Good for Retirement?
Individual Retirement Accounts (IRAs) have been around since the 1970s, and are one of the most widely used methods of saving for retirement. They are also one of the most effective, providing you utilize the following information to help you maximize their benefits.
What are IRAs?
Put simple, IRAs are a mechanism used to save toward retirement. More than just a savings account, they can include such things as mutual funds, bonds, or stocks, and are sometimes referred to as “Individual Retirement Arrangements.” There are many types of IRAs, including:
- Traditional-One of the most common types of IRA, a traditional account allows you to deduct contributions on your tax return, provided your Adjusted Gross Income (AGI) is less than $73,000.
- Roth-A plan that is similar to a traditional IRA, but does not allow for annual deductions. Instead, your distributions will be tax free at retirement. In addition, there are no capital gains fees associated with a Roth IRA.
- Simplified Employee Pension (SEP)-Designed for self-employed individuals, a SEP plan makes it possible for small business owners to offer employee plans. With a SEP plan, business owners make contributions on behalf of their workers, who are taxed when they withdraw the money at retirement.
- Savings Incentive Match Plan for Employees (SIMPLE)-This type is similar to a SEP plan, but employees are allowed to make contributions to their own accounts.
Having one or more IRA accounts can help you better plan for retirement by:
- Reducing your tax burden (either now or after you retire).
- Allowing you to withdraw funds beginning at age 59 ½, in which case you could delay retirement and draw more Social Security benefits.
- Can be used for estate planning.
- Providing up to $10,000 to use as a down payment on your first home.
When it comes to IRAs, you are not limited to only one type of account. In other words, you may have as many Individual Retirement Accounts as you choose, so long as your maximum contribution among all of them does not exceed $5,500 annually. If you are age 50 or older, you are authorized an additional “catch up” contribution of $1,000 per year.
The maximum contribution raises from time to time based on inflation. Retirement planners generally recommend upping your contribution whenever the maximum limit has increased. Keep in mind that with a traditional IRA, you will be subject to Required Minimum Distributions (RMDs) at age 70 ½, and can no longer contribute.
Although each type of IRA is slightly different, they all provide great flexibility, making them suitable for a variety of needs. For example, you may move money between accounts (something that is easier to do when you have multiple accounts with the same broker) or invest in more than one type of stock or mutual fund.
IRAS-A Flexible and Beneficial Retirement Tool
Individual Retirement Accounts provide many benefits when it comes to retirement. If you have not yet opened an account, it’s time to take advantage of this valuable tool and help secure your future.