IRA Basics

(Retirement Fundamentals)

An individual retirement account (IRA) is a way to save and grow money over a long period of time — think a couple of decades. The earliest you can take unpenalized withdrawals is six months before your 60th birthday. If you do withdraw money from a Traditional IRA before you are 59 ½, you will pay taxes and a 10% penalty. There are two types of IRAs: traditional and Roth.

GO TRADITIONAL

The traditional IRA lets you make contributions using pretax money right now, which means more of your dollar is working for you, thanks to compound interest. However, you will pay taxes when you withdraw the money in retirement.

A traditional IRA can be a good fit if you are an established worker who wants to supplement your 401(k) or if you don’t have a workplace retirement account. Putting off taxes now leaves more money to grow over time, which is helpful if you don’t have a lot saved and you don’t expect to jump to a higher income bracket in retirement. The growth of your IRA depends on:

  • How much you contribute — The more you put in, the more principal you have to grow interest.
  • The risk level of your investments — Riskier investments can mean higher payoffs, or bigger losses.
  • How long you let the money grow — The longer you let it sit, the more interest compounds in your favor.

ROTH IRA

Young man on phone learns about the difference between a traditional IRA and a Roth IRA.

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\ IRS Traditional IRAs

\ IRS Roth IRAs

A Roth IRA flips the tax scenario. You pay taxes when you make the contribution, but you don’t pay taxes when you withdraw the money. This allows your money to grow without the looming threat of future taxes. You still have to wait until age 59 ½ to make withdrawals without penalty, but there is no age when you must start taking withdrawals. Paying taxes now rather than later in a Roth IRA can make sense for:

Everything depends on your specific situation. Start with your employer’s offerings, take advantage of matching contributions and expand your exploration of IRA basics from there.

  • Future high earners. If you plan to be in a higher tax bracket later on, then taking the tax hit now might make more sense.
  • Retirement savings superstars. If you already have a lot in a traditional 401(k), the Roth IRA can be a good choice because today’s tax rate likely is lower than the tax rate of the future.

As always, we’ve got your back. — The On Your Own Team End of article insignia

 

 

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