It’s never too early to start thinking about your future. IRAs, or Individual Retirement Accounts, are a relatively simple way to start the saving process for the golden years. A sobering fact is that 31% of working Americans have no retirement savings, according a 2014 Federal Reserve study: http://www.reuters.com/
This is coupled with the fact that social security will not cover costs in full and a majority of Americans plan either not to retire or to work much longer than the traditional retirement age.
The good news? Something is better than nothing. IRAs can be started with a little bit of money and grow over time faster than inflation, compounding over time as the money earned in the account begins earning money in addition to what is put in. Here is a video about it: https://www.youtube.com/watch?
IRA does more than ensure you have something to look forward to when you do come of retirement age. In many cases, you contributions can be tax deductible.
Because IRAs straddle the worlds of saving, taxes, and investing, they can feel overwhelming. Don’t let the new vocabulary throw you; this is our quick guide to IRAs at Oak Bank. (Note: some basic IRA definitions and concepts can also be found here: https://www.oakbank.com/news-
IRAs can be opened 1) for you through work or 2) by you for you. (Yes, that’s one of the things we do at Oak Bank.)
Several people can contribute to your IRA: 1) your employer (if they offer that benefit) 2) you or 3) your spouse, if you file jointly.
IRAs can hold different kinds of investments. For example, if you are 25, you can probably take more risks with your money than someone who is 55. If we help you set up your account, we are happy to go over options with you (as would anyone who provides this service).
Two Kinds: Roth IRAs and Simple IRAs
Deciding between a Roth or Traditional IRA is an important part of the process.
One of the largest differences is the way tax deductions work in each. For a traditional IRA, you can get tax deductions the same year you contribute, but any withdrawals you make in the future become taxable. For a Roth IRA, you don’t get a tax break for putting money in, but when you take money out at retirement, it’s (usually) tax-free. In short, you can pick whether you pay taxes now or later and there are pros and cons to both Traditional/Simple IRAs and Roth IRAs.
A traditional IRA also requires you to start making regular withdrawals at 70 ½ years old, but that’s not the case with a Roth IRA. If you never want to dip into your Roth IRA, you don’t have to (In other words, it’s a great option for those who primarily just want to leave something for their beneficiaries).
IRAs and Taxes
As we mentioned earlier, your contributions to your traditional IRA may be tax deductible. This depends on the type of IRA you have, your AGI (annual gross income), marital status, and whether or not your retirement plan is covered through your workplace. It’s worth taking a look at the charts to find out where you stand, because you may fall under the full or partially deductible umbrella. Here are the IRS charts for the deduction limits for a workplace IRA and for a non-workplace IRA.
There are limits to how much you can contribute to an IRA that vary slightly from year to year. For 2015, the limit is $5,500, or $6,500 if you are above the age of 50. If you have any questions about your annual contributions and limits, get in touch with us and we can help you.
A Word of Caution
You can withdraw money from your IRA at any point, but before the age of 59 ½ you have an early withdrawal penalty of 10%, for both types of IRAs. In addition if the IRA money is considered income, you are also taxed at your regular rate. So yes, you can pay a large financial penalty for early withdrawl of your IRA so it’s best not to touch it once it’s set up.
Start Now, Be Happy Later
It’s never too early to start saving for retirement, or if setting up an IRA is not a good choice for you, setting up some other kind of savings plan. Put yourself ahead of the majority by thinking of your future (and potentially the future of your beneficiaries).
We are happy to walk through your options with you, just contact Oak Bank today and we can get you on the path to financial freedom. Your future self will thank you!