IRAs Offer Tax-Advantaged Retirement Savings
IRAs are investment accounts that are designed to provide you a tax-advantaged way to save for retirement. The special IRS status given to IRAs also comes with some limitations, such as how much you can contribute, when you must begin taking distributions, and what happens when you take your distributions too soon.
You should consider investing in an IRA if:
- Your employer (or your spouse's employer) doesn't offer a qualified retirement plan, such as a 401(k), 403(b), or a profit sharing or pension plan
- You're maximizing your contributions to your employer-sponsored plan and would like to save more
- You're changing jobs and need to move your assets from your former employer's qualified retirement plan
- You want to consolidate your retirement savings for easier management
There are several types of IRAs you can choose from, each with their own set of rules and tax advantages. Your financial advisor can help you determine which of the IRAs makes the most sense for your situation. However, below is an overview that can help you determine which of the IRAs you may qualify for.
Traditional IRAs. Your Traditional IRA contribution may be deductible. If you or your spouse are covered by an employer-sponsored retirement plan, modified adjusted gross income (MAGI) limits may apply for deductibility purposes. You (or your spouse if married filing jointly) must have earned income in order to make an annual contribution. You cannot contribute once you turn age 70 1/2. Earnings are not taxed until distributed.1
Roth IRAs. Annual contributions to a Roth IRA are made after taxes rather than pretax. MAGI limits apply for eligibility to contribute. You (or your spouse if married filing jointly) must have earned income in order to make a contribution. There is no maximum age limit on annual contributions. Also, a non-Roth IRA can generally be converted to a Roth IRA. However, conversion triggers income tax liability on the taxable portion converted. Roth IRA distributions of earnings are tax-free if you meet certain conditions.1
SEP & SIMPLE IRAs. SEP IRAs and SIMPLE IRAs are retirement plans designed for the needs of small business owners and their employees. They offer tax-deductible contributions for the employers as well as tax-deferral for the employees.2
IRA Rollovers. Take your retirement savings with you when you change jobs or retire. This gives you investment flexibility and helps make managing your retirement savings easier. Generally you can roll over your retirement savings into a Traditional or Roth IRA.
Please keep in mind that rolling over assets to an IRA is just one of multiple options for your retirement plan. Each of the following options is different and has distinct advantages and disadvantages.
- Roll assets to an IRA
- Leave assets in your former employer’s plan
- Move assets to your new/existing employer’s plan
- Cash out or take a lump sum distribution
When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty-free withdrawals are available, treatment of employer stock, when required minimum distributions may be required, and protection of assets from creditors and legal judgments. The costs of investing and maintaining assets in an IRA with us will generally involve higher costs than the other options available. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
Note: Rolling over your retirement savings into a Roth IRA may trigger a tax liability.
Your Financial Advisor can help you determine which IRA makes sense for your particular situation and help you develop a retirement plan that can help you meet your long-term goals. Contact your Financial Advisor for more information.
1Traditional IRA distributions are generally taxed as ordinary income. Qualified Roth IRA distributions are federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 1/2 or meets other requirements. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Both may be subject to a 10% federal tax penalty if distributions are taken prior to age 59 1/2.
2Withdrawals are subject to ordinary income tax and may be subject to a federal 10% penalty if taken prior to age 59 1/2. For SIMPLE IRAs the federal penalty increases to 25% if a distribution is taken prior to two years from the first deposit made into a participant’s account if under age 59 1/2.