The New Year is not just a time to think about making resolutions; it’s actually a great time to think about retirement. Or, more specifically, saving for retirement with an Individual Retirement Account (IRA).
According to CNN Money, an IRA is “a saving account with big tax breaks that makes it an ideal way to sock away money for retirement.” The good news is that there’s no shortage of IRA options for today’s retirement savers. In fact, according to The Motley Fool, there are 11 types of IRAs – The most common being Traditional and Roth IRAs.
Traditional IRA – Tax benefits today.
In short, a traditional IRA is a tax-deferred way to save for retirement. With a traditional IRA, you don’t pay taxes on the money you contribute until you withdraw the funds in retirement. The benefit of deferring taxes until retirement is that your dividends, interest and capital gains compound each year, allowing your funds to accumulate faster.
Roth IRA – Tax benefits in retirement.
In contrast, a Roth IRA is a type of IRA that does not offer tax-deductible contributions, but rather offers tax-free withdrawals in retirement. The main benefit is that you will be able to enjoy your retirement nest egg without paying taxes.
Whether you choose a Roth or traditional IRA depends on whether you want to have tax benefits today or in retirement. The Motley Fool provides more information on the specific differences between the two plans.
Other Types of IRAs
If you didn’t know about the other types of IRAs, you aren’t alone. But, depending on your needs, you may want to consider other types of IRAs, including
- SEP-IRA. If you’re self-employed, you can take advantage of a traditional IRA for self-employed individuals — a SEP-IRA. A SEP-IRA offers higher contributions amounts than traditional IRAs. And, if you have employees, you can contribute to their IRAs, thereby increasing your contributions and tax benefits.
- Education IRA. If you are saving for education, you can take advantage of an Education IRA. Although there is no tax deduction allowed for the contribution, deposits and earnings can be withdrawn tax free if used to pay for the costs of higher education.
You can learn more about the specific guidelines and requirements of IRAs, including contribution limits by visiting the IRS website.
We’d be happy to provide more information on the options available to you and help you choose the IRA solution that best fits your needs. For more specific information about your situation, speak with your tax advisor.