Got a Retirement Plan? Why You Still Need an IRA
An Individual Retirement Account (IRA) allows you to save taxes today while you save for your retirement. That's a one-two punch that offers a big payoff whether you are five years from retirement or 50 years away. Here are the basics you need to know.
Advantages of IRAs
There are several types of IRAs. The traditional IRA typically provides immediate tax advantages by:
- Lowering your taxes by allowing you to deduct your contributions from your income before figuring your income taxes.
- Protecting your earnings from taxes until you take a qualified withdrawal from your account. A "qualified" withdrawal is one that meets IRS rules.
A second type of IRA, the Roth, provides tax advantages once your reach retirement, and offers greater flexibility when withdrawing. A Roth IRA is a good option if:
- You participate in an employer sponsored defined benefit plan (a traditional pension plan).
- You expect to be in a higher tax bracket after retirement.
How to know if an IRA is right for you
Here are three scenarios where an IRA may be appropriate for you:
1. You have a windfall. For example, you just received a larger-than-expected income tax refund. Consider putting it to work for the future by opening a traditional or Roth IRA
2. You're changing jobs. Avoid taking a distribution from your former employer's retirement plan. If you do, you'll be subject to withholding taxes and a 10 percent penalty, plus you'll lose the advantages of tax-deferred growth potential. Instead, transfer the retirement funds directly into your new company's retirement plan (if allowed) or into a Rollover IRA that you open especially for that purpose.
3. You are maxed out. If you're fully funding your employer's plan, an IRA may help boost your retirement savings even more. It can also be a good way to save when you are between jobs (as long as you have earned income for the year) or during waiting periods before you can participate fully in your company's plan.
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Make savings simple! Simplify your retirement saving with an IRA.
