Should I Open an IRA?
Much of what we hear about saving for retirement centers on contributing as much as we can to our 401(k) or similar workplace retirement plan. IRAs sometimes are ignored for a variety of reasons, including the lower contribution limits compared to a 401(k).
However, an IRA can actually play an important role in your 401(k) investment strategy. Let’s look at some examples.
What is an IRA
An Individual Retirement Account (IRA) is a type of savings account that is designed to help you save for retirement and offers many tax advantages. Everyone, regardless of income, is eligible to contribute $5,500 ($6,500 if you are 50 or over) to an IRA account. But, you cannot contribute more than your earned income (income from work).
The many substantial benefits of IRAs include:
- Tax-Deferred Investment Growth: With an IRA, the gains on your investment grow tax-deferred (or tax-free with a Roth).
- Supplemental Retirement Savings: If you are maxing out your 401(k), or simply seeking additional options, an IRA is a great way to put away more for retirement, especially if your savings level is behind where you’d like it to be.
- Retirement Option for Everyone: IRAs present a great opportunity for those without access to a 401(k) or other retirement account.
- More Investment Options and Flexibility: Most IRA providers offer a wide variety of investment options to choose from.
Without doubt, IRAs provide an ideal way to stash away cash for retirement and pave the way to financial freedom in your future years.
Which IRA is Best for Me?
Now that you grasp some of the general benefits, are you wondering what the best IRA accounts are? Well, there are a few different choices, depending on your status and needs. Take a look at these options for individuals as well as the self-employed.
For the Individual
A traditional or Roth IRA is a great way for an individual to get started on saving for retirement. The biggest difference between these two options is when you reap the tax benefits. Here are a few key facts, pros and cons about these approaches:
- Pre-tax contributions to a traditional IRA are subject to income limitations, only if you are covered by a retirement plan at work and your money grows tax-deferred and isn’t taxed until your withdraw it.
- Roth IRA contributions are subject to income ceilings as well, but withdrawals are tax-free at retirement (providing certain rules are followed).
- Anyone, regardless of income, can contribute to a traditional IRA on a post-tax basis. While the contribution is not deductible, earnings on investments grow tax-deferred until withdrawn.
- Spousal IRAs allow a non-working or low earning spouse to contribute to an IRA subject to certain household income restrictions.
In each of these choices, the earnings on your investments grow tax-free while in the account, giving your money and your financial future an extra edge.
For the Self-Employed
Beyond the traditional and Roth IRA, a SEP-IRA account offers more generous contribution limits (up to 25% of your self-employment compensation) and can be opened at most major custodians. While a SEP-IRA can be used with employees as well, it is generally more cost-effective for an owner with a spouse and/or a business partner.
If your business has employees, a SIMPLE IRA might be a more cost-effective option for your business. A SIMPLE IRA, or Savings Incentive Match Plan for Employees, as with most traditional IRAs, your contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement.
Then there is a Managed IRA, which is a great option for businesses that want to offer their employees another option for their retirement savings because it takes the uncertainty out of investing—a relief that many employees can appreciate!
Lastly, we should mention we are proud to be one of the first to provide a Managed SIMPLE IRA option, so if this sounds like the right option for you—let’s talk! We pride ourselves in taking a whole-picture planning approach for our clients, building customized, risk-appropriate portfolios with low-cost funds. Want to learn more? Check it out here.
401(k) Rollover to IRA Advantages
When leaving a job, rolling your 401(k) account to an IRA can be a great choice. This is especially true if your former or new employer’s plan doesn’t offer a solid, low-cost menu of investment choices.
An IRA is a sound way to consolidate the money from several old retirement accounts and manage this money on a consolidated basis. With Americans switching jobs more often throughout their careers than in the past, an IRA is a great vehicle to get your arms around these old accounts into one, consolidated place.
At the end of the day, an IRA should not be overlooked as part of your overall retirement savings strategy. IRAs are a great way to accumulate extra amounts for retirement, a great vehicle for consolidating and managing old retirement accounts, and a solid option for the self-employed. Additionally, an IRA can offer low costs and investment flexibility that may be missing in your workplace retirement plan. Thinking about a rollover but not sure? Check out our 401k rollover calculator to help you decide what to do.