Is an Individual Retirement Account (IRA) Right for You?

When considering a retirement strategy, one of the first questions you should ask is whether an individual retirement account (IRA) is right for you. IRAs are useful tools for any retirement strategy since they provide a means to lock money away and offer tax advantages. This blog will offer some insight into IRAs to help you determine what type suits your retirement needs. Opening an IRA is the easiest way to start saving for the future.

It’s never too early to start planning for retirement. In fact, the earlier the better. The more money you can put aside early before family obligations and other lifelong commitments ensue, the more money you will have when it’s time to retire. Anyone can open an IRA account, even if you have a 401(k) retirement savings plan where you work. A key fact to keep in mind: Your IRA continues to build on itself and in a way, it’s your smartest investment. Start as soon as you can and enjoy a larger payout for your efforts.

What is an IRA?

An IRA is a tax-advantaged form of savings account that allows you to set money aside for retirement. There are different types of IRAs, and each has different terms, deposit restrictions, and tax implications, so understanding the available IRA options will help you plan your retirement strategy.

The way IRAs work is they allow you to invest a percentage of your income to save taxes. You can deduct up to $6,000 per year for an IRA investment—$7,000 if you are over age 50—although there are limits as to how much you can invest based on your income. You also can use an IRA to invest your money in different types of funds. However, you still have to choose the right type of IRA:

Traditional IRA

A traditional IRA lets you invest in stocks and bonds and you can contribute to it every year. However, once you make your deposits, you can’t access the money from an IRA without incurring a penalty for early withdrawal, typically, a 10% fee plus taxes if you withdraw before age 59 ½.

Roth IRA

A Roth IRA has the same deposit restrictions as a traditional IRA but the taxes are handled differently. A traditional IRA is tax-deferred, which means you pay income tax when you withdraw the funds. A Roth IRA is purchased with post-tax dollars, which means the money is tax-free since taxes have already been paid. Roth IRA’s tend to be beneficial if you pay less in taxes right now and believe you will be in a higher tax bracket at retirement. By choosing the Roth IRA, you are taking advantage of paying less in taxes now and having tax-free withdrawals in retirement regardless of what tax bracket you are in. And unlike other IRAs, Roth IRAs don’t require you to withdraw funds at age 72 so you can let your money continue to grow.

SEP IRA

An SEP IRA is part of a self-employment pension plan and is designed for small-business owners and those who are self-employed. Contributions to SEPs are higher—up to 25% of your income to a maximum of $58,000—and the money is tax-deferred.

SIMPLE IRA

A fourth option is a SIMPLE IRA, which is designed for small businesses with fewer than 100 employees. SIMPLE stands for Savings Incentive Match Plan for Employees Individual Retirement Accounts and is similar to traditional IRAs with tax-deductible contributions. However, employers match the IRA deposits, so the maximum contribution is $13,500 per year for those under age 50 and $16,500 for those over 50.

What are the pros and cons of an IRA?

There are several advantages to contributing to an IRA. In addition to the tax benefits, you also are putting money aside where you are less likely to use the cash. The reason there is a 10% penalty for early withdrawal is to encourage you to save for retirement rather than using the money for something else.

You also can invest the money as you wish. There are a variety of investment options with different returns. You can invest in stocks, bonds, mutual funds, or other financial vehicles based on your aversion to risk. You also can invest in green businesses or specialty funds if you want to invest your money where it has social benefits.

Of course, there are disadvantages to IRAs depending on your circumstances. For example, there are limits to what you can deposit in an IRA.

If you are concerned about tying up your money until you retire, there are other financial products available. Certificates of deposit (CDs), for example, require you to deposit your money for a specified period from a few months to a few years. You can choose the length of a term of a CD, but if you withdraw the money early, you pay a penalty. There are IRA CDs, which work just like IRAs and roll over into a new IRA CD when they mature, although there are still penalties for early withdrawals.

iQCU can help with IRAs.

It pays to work with a financial professional when choosing IRAs. iQ has investment and retirement professionals who work with members to understand their retirement needs to make the right recommendations, including the right IRAs. And since iQ is committed to helping our members reach their financial goals, we work with you to adapt your retirement plan as your life changes.

To get started, download our guide, Retirement Strategies: Building a Successful and Secure Retirement, or contact your local iQ Credit Union branch and ask about retirement investments that suit your goals.