Explore individual retirement accounts
The traditional and Roth Individual Retirement Accounts (IRAs) are great ways to save even more for retirement in addition to the contributions you can make through your employer.
Contribution limits can increase year to year depending on if there is a cost of living adjustment. For 2020, individuals can contribute up to $6,000 ($7,000 if you’re 50 or over). You could put it all in a traditional or Roth IRA or some contribution that adds up to the limit. The tax benefits of the two IRA types are different.
During retirement, if you have both a traditional IRA and a Roth, you will have more flexibility and control over your tax situation from year to year. Here’s what you need to know:
- You may get a tax deduction when you make a contribution, and any earnings and gains in the account are not taxed during the entire time the money is invested.
- If you choose to make a withdrawal prior to age 59 ½ you may be subject to a 10% IRS penalty.
- After age 59 ½, you may make withdrawals without penalty. However, once you reach age 72, you will be subject to required minimum distributions.
- Amounts withdrawn are taxed at the ordinary income tax bracket you’re in at the time. For most people in retirement, it could be a lower tax rate than when you were working, which may provide an additional advantage.
Contributions you make may be fully or partially deductible, depending on your circumstances
- A Roth IRA contribution is not eligible for a tax deduction in the year you put dollars in the account, but after that, your money has the potential to grow tax-deferred.
- Qualifying withdrawals are tax-free as long as certain qualifications are met. See your tax advisor.
- For some people, tax rates may be lower when they earn the money than when they withdraw it (young people beginning their careers, for example).
- A difference with a Roth IRA is that, unlike a traditional IRA, there are no required withdrawals during the owner’s lifetime.
- It’s important to note that not all investors will be eligible to contribute to a Roth.
You can leave amounts in your Roth IRA as long as you live
Whether you’re contributing to a traditional IRA, a Roth IRA or both, an advisor can help you consider which option is right for you.