How to Choose the Right Retirement Account for You
1. Traditional IRA
A Traditional IRA is a tax deferred savings account meaning individuals can put pre-tax money into the account and it grows tax free. Taxes are then paid on the money when you withdraw from it during retirement.
Setting up a traditional IRA can be done by transferring an existing retirement savings like a 401K to your newly established IRA, or starting a brand new IRA with a lump sum contribution. The easiest way to fund your IRA on a regular basis is by making automatic contributions via your banking accounts or direct deposit.
There are other items to consider such as how you will determine your investments (hands on broker or an automated service). Also consider there are contribution limits. If you’re under the age of 50 your contribution limit is $6,000 and if you’re 50 or older, the limit is $7,000 annually. These limits can occasionally change, so make sure you stay up-to-date with any changes made by the IRS each year.
Lastly, there are withdrawal rules if funds are taken out before a certain time. For a traditional IRA, you will be penalized if you withdraw before age 59 ½. There are exceptions to this rule such as using funds to pay for higher education and purchasing a home among others. However, when you reach 72, required minimum distributions begin annually.
2. Roth IRA
A Roth IRA is funded from after-tax contributions, allowing your money to grow tax free. This means that you pay taxes on the money you contribute at the time of contribution, so there are no taxes paid when you withdraw your funds during retirement.
There are some similarities between a Roth and Traditional IRA when it comes to getting started and funding but there are also significant differences as well. You can start a Roth IRA with a lump sum contribution or convert from a Traditional to a Roth. Keep in mind that if you go this route, you will be required to pay taxes on the converted funds. When it comes to funding the Roth, contributions must be from earned income (wages, tips, bonuses, etc.). Similarly to the Traditional, it’s easiest to automate any contributions. Also, contribution limits remain the same as a Traditional. A major difference to note is that your income must be less than $139,000 for singles and $206,000 for married couples.
As for withdrawals, note that contributions can be withdrawn at any time. However, you will need to wait until 59 ½ to avoid early withdrawal penalties, with exceptions for first-time home purchase, college expenses and birth or adoption expenses.
Unlike the Traditional IRAs, Roth IRAs also let you leave your money in as long as you wish without any required minimum distributions.
Having a plan for retirement will ensure you can live the life you envision. Start that plan today and visit the SDCCU IRA Service Center online in order to learn more, open an IRA and service an existing SDCCU IRA. With no set-up or annual fees, SDCCU is sure to offer a retirement plan that can help you reach your financial goals. Take a look at the options provided or reach out to us today. Consult a tax advisor.
Visit our Financial Knowledge Blog to learn more tips on setting up a solid financial future or
join us for Financial Wellness Wednesdays.