By now, you know that everyone should be thinking about and saving for retirement. There really is no safety net for anyone, because Social Security will only provide a portion of the income you need in retirement. So, you know that setting aside money in an Individual Retirement Account is a good option. What else do you actually know about IRAs? These three facts can help you get started.
You can choose between two types of tax benefits. You know that an IRA provides certain tax benefits, but those benefits differ drastically depending on which type of account you choose. With a Traditional IRA, you make contributions on a pre-tax basis, which can help to lower your tax liability for the years. Funds grow free of taxes, and you won’t owe taxes on the money until you take withdrawals in retirement. At that point, the money is taxed as regular income.
On the other hand, you could also choose a Roth IRA. You will make contributions on a post-tax basis, so the account won’t have an impact on your current income tax burden. However, you will enjoy tax-free income via your withdrawals in retirement.
Some people even open and fund both types of account!
Withdrawals can be flexible. You will be required to take minimum distributions from your IRA by age 70 ½. But you don’t have to take cash distributions. You could also move an investment out of the account and into a taxable account, if you prefer.
IRAs can be passed down to heirs. If you pass away before using all of the funds in your retirement account, your beneficiary will inherit it. In that case, they can continue enjoying its tax benefits (depending upon whether you chose a traditional or Roth IRA). Just make sure that they understand how the account works; some heirs make the mistake of cashing out the account, and they lose those tax advantages when doing so.
These facts are just the basics, and there is plenty more to learn before making a decision about an IRA. But as you can see, the accounts do provide important retirement planning opportunities. So give us a call, and we can discuss IRAs in more depth, and help you decide which type of account is right for your situation.