Investing in Your Future With an IRA
You’ve probably heard it before, but it bears repeating: the time to start saving for retirement is NOW. No matter what your age, no matter where you are in your career journey, the longer you invest and save, the greater the rewards in retirement.
Options for Retirement Plans
If your employer offers a sponsored plan, we urge you to take advantage of it and invest the most you can—you’ll typically want to aim for a minimum of 10% of your pre-tax income.
If you don’t have access to an employer-sponsored plan, or if you’d like to build some savings in addition to that plan, investing in your future with an IRA (Individual Retirement Account) is a great idea. So, what exactly is an IRA, what are the different kinds available, and which kind should you choose? Let’s explore those questions and provide some much-needed answers and clarity.
What, Exactly, Is an IRA?
An IRA is an account that allows you to make tax-deferred investments with the goal of providing financial security once you retire. There are two kinds of IRAs available: the traditional IRA and the Roth IRA.
- A traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible.
- A Roth IRA is a tax-advantaged personal savings plan where contributions are not deductible but qualified distributions may be tax free.
What Kind of IRA Is Right for Me?
This depends largely on your annual income and tax bracket. Age and filing status also play significant roles.
Access to your funds is controlled and restricted in exchange for significant tax breaks. Traditional IRA contributions can lower your taxable income for the contribution year, which then lowers your adjusted gross income. This can help you qualify for various tax incentives like the child tax credit or the student loan interest deduction.
Participation in a traditional IRA is available to anyone with earned income, but tax deductibility is based on income limits and participation in an employer plan. When retirement rolls around, there are required minimum distributions (set amounts you are required to withdraw at certain times), and those distributions are taxable.
Roth IRAs are more like standard investment accounts with additional tax benefits. The restrictions are fewer than with traditional IRAs, but so are the tax breaks. You do not get a tax deduction when you make contributions to your Roth IRA, so your adjusted gross income is not lowered. However, once you retire, withdrawals from your Roth IRA do not get taxed, as you’ve already paid the taxes up front. If you are younger, you can really benefit from this aspect of the Roth IRA because you have lots of time to grow your account balance.
Roth IRAs do not carry a required minimum distribution, so you are never required to withdraw any money at any age, which makes them a good way to transfer wealth to beneficiaries after your death. There are income restrictions on Roth IRAs. In 2024, they are limited to single tax filers with modified AGIs from $146,000 to $161,000 and married couples filing jointly with modified AGIs from $230,000 to $240,000.
There can be a little strategy involved in making your choice, as well. If you expect that you’ll be in a higher tax bracket when you retire, you might want to opt for a Roth IRA so you’re paying taxes now at a lower rate, then withdraw funds tax-free when you’re in a higher tax bracket in retirement. If you predict that you’ll be in a lower tax bracket come retirement, a traditional IRA could be the better choice.
What if I Need My Money Before Retirement?
Again, this depends on which kind of IRA you’ve chosen. Traditional IRAs are subject to taxes and a 10% early withdrawal fee until age 59 ½. Roth IRA contributions can be withdrawn at any time during the tax year, tax free and penalty free. Withdrawals on earnings are tax free five years after your first contribution and after age 59 ½. Prior to age 59 ½, withdrawals from your Roth IRA on earnings (amounts above your contributions) will be taxed and subject to a 10% early withdrawal penalty.
There are exceptions to penalties for special circumstances like permanent disability, certain levels of unreimbursed medical expenses, qualified first-time homebuyer expenses, or qualified higher education expenses.
Understandable. Investing in your future with an IRA is a great idea, but the rules and regulations around these products can get complicated and confusing. Luckily, we have experts standing by to talk you through the decision-making process and help you open a new IRA account or transfer an existing account to Cornerstone. We will make it easy for you to make a decision—and an investment—you feel good about.
Contact us today and we will connect you with an expert who can answer your questions and get the process started for you.
Material is for educational purposes only and not intended as personalized tax or investment advice. Consult with a qualified tax or financial advisor for more information.