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What are My IRA Options?

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A Guide to Retirement Savings

Navigating retirement planning can feel overwhelming, but choosing the right IRA can provide financial security and tax advantages. Whether you're considering a Traditional IRA for tax-deferred growth or a Roth IRA for tax-free withdrawals, understanding your options is key to maximizing your savings. Explore self-directed IRAs and employer-sponsored plans to tailor your retirement strategy to your financial goals.

What are My IRA Options?

Retirement planning is far from simple. Sometimes, it feels like you are speaking a different language from everyone else. From terms like 401(k) and 403(b) to IRAs, it can be a bit overwhelming. The better you understand your IRA options, the greater your flexibility in managing your retirement investments becomes. Here are a few key details and facts about IRAs that you need to know.

Individual Retirement Accounts

First things first—what is an IRA? IRA stands for Individual Retirement Account, a specific type of tax-advantaged investing account set aside for retirement savings. The various types of IRAs allow for improved flexibility and freedom in your retirement investing. The more you learn about your options, the more informed your decision can be about which type of IRA best meets your needs and interests.

Before diving in too far, it is essential to understand that whether your contributions to an IRA are tax-deductible depends on several factors, including accessibility to employer-sponsored retirement plans and your income. There are also limits on how much you can invest in IRAs each year. Additionally, funding limits can vary from one type of IRA to the next. It is wise to consider all options before choosing one over another so that you have a clear understanding of what each one will mean for your retirement savings.

Traditional IRAs

As long as you are employed—whether self-employed or otherwise—and under the age of 70.5, you can invest in a traditional IRA, provided you meet the income limitations and abide by the maximum contribution limits.

If you participate in an employer-sponsored retirement plan, you may still contribute to a traditional IRA, but those contributions may not be tax-deductible. However, the earnings grow tax-deferred.

With a traditional IRA, you may begin receiving distributions at the age of 59.5, provided you have had the account open for at least five years. You must start taking distributions by April 1 of the year following the year you reach the age of 70.5.

The costs of early withdrawals are high and include taxation and an IRS penalty of 10 percent. However, you may receive a loan from your IRA, which must be repaid within 60 days to avoid early withdrawal penalties.

Roth IRAs

While Roth contributions are never eligible for tax deductions, the earnings on these investments grow tax-free. Investing in this type of IRA is essentially giving yourself the gift of tax-free income during retirement. The limits for investing in Roth IRAs are typically the same as those for traditional IRAs when it comes to income and contributions.

Another benefit of the Roth IRA is that it offers more lenient rules regarding withdrawals. Anyone who anticipates retiring in a higher tax bracket than their current one might want to consider the post-retirement tax benefits this type of IRA provides.

Roth IRAs are also exceptional choices for people interested in leaving their heirs tax-free income. In some cases, the funds can last throughout their lifetimes, according to Bankrate. Additionally, you can continue contributing to your Roth IRA even after reaching the age of 70.5, which is not possible with a traditional IRA.

One more reason to give the Roth IRA serious consideration applies to high earners who exceed the income limits for a traditional IRA. This can be done by making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA. Taxes must be paid on any gains made at the time of conversion. Many refer to this strategy as the Roth Backdoor. However, tricky tax considerations come with this option, and you should seek the advice of a tax professional before pursuing it.

Self-Directed IRAs

This type of IRA, while governed by the same contribution and income limit rules as other types of IRAs, offers greater freedom in terms of the types of investments allowed. Traditional and Roth IRAs typically limit investments to standard options such as:
  • Stocks
  • Bonds
  • Mutual funds
Self-directed IRAs, however, offer an expanded list of assets in which you can invest, such as:
  • Gold
  • Silver
  • Real estate
  • Privately held companies
While self-directed IRAs provide more options, they also come with stricter regulations regarding how the funds can be used concerning these investments.

SEP IRA

Short for Simplified Employee Pension IRA, these are employer-sponsored IRAs. Contributions are made by the employer, providing a flexible, cost-effective option for employers who want to help employees save for retirement but cannot contribute every year. The employee controls the funds in the account, while the employer makes contributions when possible and receives a tax deduction for them.

Simple IRA

This employer-sponsored plan stands for Savings Incentive Match Plan for Employees (SIMPLE) IRA. It is best suited for small businesses with fewer than 100 employees who earn at least $5,000 annually. A significant benefit for employees is that employers may make matching or non-elective contributions.

What's Next?

Planning for retirement is all about making informed choices, and understanding your IRA options is a crucial step. Whether you're considering a traditional IRA, Roth IRA, or exploring employer-sponsored plans, Salem Five Bank offers retirement solutions designed to help you grow your savings with confidence. Take advantage of their insights and tools to ensure your financial future is secure. 

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