Knowing what to do to save for retirement can be confusing. Anyone can own an IRA since it does not have to be set up with an employer. A 401(k), on the other hand, is traditionally a perk offered by employers.
IRAs
IRA stands for Individual Retirement Account. This type of retirement savings began it’s life in 1974 as a way for workers who did not have access to employer sponsored retirement plans to be able to save for retirement. Through the years several modifications have been made, all in the name of helping people save for retirement.
There are various types of IRAs, but the most common are traditional and Roth. Other IRAs include provisions for small businesses or the self-employed, as well as an option that is similar to a 401(k).
Traditional IRA
This is perhaps the most common form of IRA. Individuals under the age of 50 can contribute up to $5000 per year. If you are over 50, you can contribute up to $6000. The money you put in is tax deductable for the year. You don’t get taxed on the money until you withdraw it at retirement. It is set up this way because a person’s tax bracket is usually lower than when they were working. Therefore, you would get charged less in income tax on that money. It’s a way to save for the future and be able to pay less for it.
But say its December 31st and you have only contributed $3500 to your IRA. You have the option to finish contributing for the year up until you pay your taxes in April.
Roth IRA
The big difference between a Roth and Traditional IRA is how they are taxed. Traditional IRAs are taxed when you withdraw finds. Roth IRAs on the other hand, are built with funds that have already been taxed. Roth IRAs also do not give a tax deduction for the year the funds are invested, but they are tax free when you retire. Even the gains on the account cannot be taxed. In fact, this is the only retirement vehicle that is not taxable. It all depends on when you want to pay taxes. Which, let’s face it, are inevitable.
If you can’t decide which is best for you, talk to a professional. It could turn out that both types of IRAs will work best for your situation and retirement goals.
Your 401(k)
If you are planning to, or have left an employer where you have a 401(k) plan, it is in your best interest to roll that plan over to an IRA. This gives you control over how your money is invested. If you leave it with your past employer, you are trusting them to do what is in your best interest. If you don’t work there anymore, how will you know that is what will happen? Rolling it over to an IRA will give you that control and peace of mind.
Without a doubt there is a lot to know when it comes to figuring out retirement planning. Speaking to someone who has your best interests in mind and who has the knowledge to answer your questions so you can make the best decision is important.
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