What is an IRA Plan?
An individual retirement account (IRA) is a popular way to invest in financial security. An IRA isn’t a type of investment, it’s a type of account; the funds contributed to the account are redirected into a variety of investment options, such as stocks, bonds, or mutual funds. Interest grows on the contributions over time, and the funds are distributed once the account holder retires as a form of income following employment.
IRA account holders enjoy significant tax breaks, which can result in some sizable savings – both now and in the future. Furthermore, IRA plans are attractive due to the flexibility and diversity they offer when compared against other retirement options. There are several IRA types to choose from, and which one you select should be based on your age, income, and goals, among other factors. They’re easy and convenient to set up, and can exist alongside your employer-established retirement plan. Read on to learn the different types of IRAs, their various tax incentives, corresponding contribution limits, investment options, and planning strategy.
Types of IRAs
Individuals have several IRA types to choose from when selecting their savings vehicle. All types of IRAs offer a way to put aside money for retirement, but each form has distinct advantages in terms of taxation and payouts.
- Eligibility for a Traditional IRA account is not determined by income; however, no contributions can be made to the account after age 70½.
- After this age, you must begin taking required minimum distributions (RMDs) from the account by April 1st of the following year. The withdrawals may be subject to federal income tax, but the account savings grow tax-deferred.In this sense, a Traditional IRA allows the account holder to postpone taxes as they save for retirement. Depending on your modified adjusted gross income and whether or not you’re covered by a retirement plan at work, portions of the money contributed to the account might qualify as a deduction on your tax return.
- Unlike a Traditional IRA, there is no age restriction for Roth IRA contributions. You can put money into the account for as many years as you’d like, as long as you have earned income that qualifies. Contributions are made to the Roth account using non-deductible, post-taxed income, but the funds are never taxed at the time of withdrawal. There is no mandatory withdrawal for Roth IRA funds at any age, and no RMDs for as long as you live. A Roth account allows you to withdraw your money when you want—without the burden of owing taxes (as long as you’re 59½ and have had the account for at least five years). A Roth IRA may also be passed on to your beneficiaries.
These are the two most common IRA types, as they can be opened by anyone with a qualifying income. However, there are two additional types of IRAs that can be offered by employers: Simplified Employee Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE). SEP and SIMPLE IRAs provide a way for employers to make tax-deductible contributions to their own retirement account as well as their employees’. All SEP, SIMPLE and Traditional IRAs may be converted to Roth IRAs by paying income taxes on the distribution before rolling over.
IRA Tax Advantages
Different IRAs have overlapping characteristics, but they vary in terms of their tax structure.
- Contributions to the account may be tax-deductible
- Account earnings grow tax-deferred
- A portion of withdrawals may be tax-deductible
- No taxes on withdrawals of contributions
- No taxes on account earnings (as long as you’ve had the account for five years and are above age 59½, unless special circumstances apply)
In short, a Traditional IRA reduces your taxable income and allows you to postpone your tax bill as the account grows; a Roth IRA sets aside after-tax income for retirement, but all earnings and principal are tax-free as long as you follow the IRS rules. Note that if you withdraw from an IRA account before age 59½, you must pay the ordinary income tax plus a 10 percent federal penalty tax.
What if I already have a 401(k)?
If you already have a 401(k) account, you can opt to roll over those funds into your newly opened IRA. There are three ways you can typically roll over pre-existing funds: direct rollover, 60-day rollover, and trustee-to-trustee transfer.
- Direct rollover: If you receive a distribution from your retirement plan, you can ask the plan administrator to make the payment directly to your IRA—no taxes will be withheld.
- 60-day rollover: If you receive a distribution from a retirement plan directly, you can choose to deposit a portion of it or all of it into an IRA within the first 60 days. However, taxes will be withheld from your distribution.
- Trustee-to-Trustee transfer: If you receive a distribution from an IRA, you can ask your financial institution to make the payment directly from that RIA to another—no taxes will be withheld.
IRA Contribution Limits
The United States government sets IRA contribution limits that restrict the amount of money which can be placed into the account per cycle (you have between January 1, 2021 and April 15, 2022 to make a 2021 contribution). Under the present law, IRA contribution limits are set to increase with the inflation rate in $500 increments. According to the IRS, 2021 total contributions to all of your Traditional and Roth IRAs cannot be more than:
- $6,000 ($7,000 if you’re older than age 50), or
- Your taxable compensation for the year, if the compensation was less than this dollar amount
Additionally, your Roth IRA contribution may be limited by your income and filing status. IRS rules state that you cannot contribute up to the full limit if your income is over:
- Single: > $125,000
- Married filing separately: > $10,000
- Married filing jointly: > $198,000
If you have an IRA, you may be able to claim the Savers Credit. Formerly known as the Retirement Savings Contributions Credit, the Savers Credit allows an individual to claim credit for 50, 20, or 10 percent of the $2,000 they contributed during the year to their retirement account.
*Single, married filing separately, or qualifying widow(er)
IRA Investment Options
Investors enjoy taking advantage of the wide range of investments IRAs give access to – a range often more extensive than 401(k) plans. Clarifying your goals is an essential step in choosing the right asset to invest in. When considering your options, determine whether you’re investing primarily for post-retirement income or investing for growth. Various investment options include:
- Mutual funds
- U.S. Treasuries
- Certificates of Deposit (CDs)
- Exchange-Traded Funds (ETFs)
Any form of investment is subject to some degree of risk, and fluctuations in the market can affect the value of your account. If you’d prefer not to select these funds yourself, and relieve yourself of the need to personally manage your account, it might be in your best interest to have your IRA plan managed by a trusted partner.
GuidedChoice, with nearly 20 years of experience, has helped 1.5MM people invest in their future. We specialize in providing digital retirement planning and advisory services to help people reach their goals and increase their confidence.
GuidedChoice offers an IRA that comes with professional management at a very low cost, allowing you to effortlessly invest in your future. With our IRA, our Investment Committee carefully selects funds that will perform in the best interest of our investors. In seeking funds we balance low cost with how we expect them to perform. And the portfolios we offer range in risk and expense ratios to better fit the investor’s needs so they can retire the way they want. GuidedChoice employs a rigorous and proprietary methodology that is designed to achieve steady long-term growth while making smart tradeoffs for the investor to help avoid unnecessary risk. Our methodology is designed to help you reach your goals. We also use digital intelligence to monitor the funds you’re invested in 24/7 and will automatically rebalance your account when necessary—you can rest easy knowing your IRA is on the right track.
IRA plans are an excellent way to build tax-sheltered wealth. Opening an IRA is an important tool for investing in growth, income, or both. If you need help forming your retirement goal, you’re not alone. GuidedChoice was founded on the belief that everyone deserves a trusted partner to help them realize the future they want.
We can help you evaluate which type of IRA is best for your circumstance, and once that’s set, create your own personalized portfolio custom to your goals. The sooner you open your IRA plan, the greater your savings potential will be. Funds in your IRA account will compound in a snowball effect; earnings will generate more earnings, not only on the initial investment, but also on the accumulating interest, dividends, and capital gains. Contact GuidedChoice to see how we can help your money make money, and grow your IRA account faster over time. Learn why our rigorous methodology is so successful and deserves your vote of confidence for future financial freedom. Take advantage of our free concierge service with which you can schedule and appointment to evaluate what type of IRA is right for you. We can help individuals and small businesses alike with our objective to determine the best IRA option – including who to sign up with, even if it’s not us. True to our mission, our goal is to help you reach your goal, whether it’s with us or a different provider.
Head over to the appointment calendar and schedule your consultation to get started!