By: Josh Slocum, McClellan Wealth Management
IRA stands for an individual retirement account. To simplify, one contributes money, either pre- or post-tax dollars, into an IRA where the funds can be then invested for the purpose of saving for retirement.
Unlike 401(k)s, IRAs are not employer-sponsored plans, and as such, there are no employer contributions. At the same time, they can allow for more flexibility, along with the ability to invest in a wider variety of assets.
Though there are some drawbacks, as with any investment strategy, many go with an IRA largely for the tax advantages.
With any investment or investment strategy, the outcome depends upon many factors including: investment objectives, income, net worth, tax bracket, risk tolerance, as well as economic and market factors. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. With any investment or investment strategy, there is the possibility of profitability as well as loss.
IRAs Are Not One-Size-Fits-All: A Look at 6 Different Types of IRA Accounts
There are several different types of IRA accounts, and your unique situation can help you determine which one best matches your needs.
#1 Roth IRA
A Roth IRA is a tax-advantaged personal savings program. It allows you to build your retirement savings tax-deferred. Contributions are not tax-deductible, but qualified distributions after the age of 591/2 may be tax free.
#2 Traditional IRA
Unlike a ROTH IRA, contributions to a traditional IRA retirement plan may be tax deductible for those who qualify.
# 3 Payroll Deduction IRA
These plans are set up by an employer. Employees make contributions from a payroll deduction to either a traditional IRA or a Roth IRA that they have set up with a financial institution.
A simplified employee pension plan is set up by an employer who directly contributes to each employee’s IRA.
#5 SIMPLE IRA
SIMPLE stands for Savings Incentive Match Plan for Employees. This type of plan is set up by an employer. With a SIMPLE IRA plan, employees may choose to make salary reduction contributions with the employer making matching or nonelective contributions.
This type of plan is a little less common these days. A Salary Reduction Simplified Employee Pension Plan was set up by an employer prior to 1997. This plan includes a salary reduction agreement.
Why Invest in an IRA?
It’s important to invest in your future, and, for some, an employer-sponsored plan, like a 401(k), may not be enough to get you through retirement.
The primary benefits of contributing to an IRA are the tax deductions, tax-deferred or tax-free growth on earnings and overall tax deductions.
Investments can be made into both an IRA and a 401(k) at the same time. Something to keep in mind, contributions to the 401(k) can be “rolled over” to Rollover IRA and no taxes are involved.
The IRS does set contribution limits, so be sure to check those out. For 2019- 2022, the total contributions to a Traditional or Roth IRA can’t be more than $6,000 ($7,000 for those 50 and older), or if less, the taxable compensation for the year. This limit does not apply to rollover contributions.
It’s also important to note IRAs do have lower contributions limits than some other retirement accounts. They also come with a hefty early withdrawal penalty of 10%.
So while IRAs are a great way to save for retirement, there are some downsides to take into consideration when deciding whether or not an IRA is right for you.
Look Forward to the Future with McClellan Wealth Management
If you’re looking to self-manage your account, opening an IRA is fairly easy online with many national companies to choose from.
If you choose to take this route, I’d recommend comparing the costs and benefits from each company, as well as the different types of IRA accounts before making a decision.
If you’re looking to open an IRA, but have a financial advisor manage, your personal financial advisor can help guide you through the steps.
Getting started with a retirement plan can feel overwhelming. Your employer may have a plan you already contribute to, but it may not be enough to get you through your retirement years.
Our experts would love to sit down with you and go over your current plan or help you develop one and decide on which plan best fits your needs.
Give us a call today at 205-208-9868 or contact us online.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Advisory services offered through McClellan Wealth Management, a Member of Advisory Services Network, LLC.