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Saturday, March 02, 2024

The advantages of an IRA

The advantages of an IRA

Key takeaways 

An IRA can provide numerous benefits when it comes to growing your nest egg. It can help you increase your retirement savings, reach your financial goals, and prepare for a secure future. 

12.21.2021

An IRA is one big way to grow your nest egg

Three letters. 

Endless possibilities. 

As you may know, IRA stands for "individual retirement account."

What is an IRA?

Whether you choose a traditional IRA or a Roth IRA, two of the most common options, an IRA is a valuable resource that can help you put more money toward your future. Unlike a 401(k) plan, in which you enroll through your employer and through which you defer a specific percentage from each paycheck, you set up an IRA on your own through a financial services provider. In most cases, an IRA is easy to open, maintain and access.

What are some reasons to consider an IRA?

Increase your savings

Some professionals suggest you’ll need about 80% of your pre-retirement income or salary to help cover your cost of living in retirement. If you’re already participating in your workplace-sponsored program, you’re off to a great start. But if you don’t have a retirement plan at work, like a 401(k), or if you want to sock away a little more and supplement your current savings in your plan, an IRA may be a good solution for you.

You can contribute to both a 401(k) and an IRA

Because you can contribute to both a 401(k) and an IRA at the same time, you can gain even more ground on your long-term vision.

  • In 2022, for example, the IRS contribution limits for a traditional IRA or Roth IRA sit at $6,000. If you’re age 50 or older, you can save up to an additional $1,000 in catch-up contributions for a total of $7,000. 
  • In 2023, you can contribute up to $6,500 and if you’re 50 or older, you can contribute an additional $1,000 in catch-up contributions for a total of $7,500. These thresholds apply to your combined traditional and Roth IRAs (if you have multiple).

Remember, the IRS sets separate contribution limits for IRAs and 401(k) accounts. For example, if you are 35 years old and max out both types of accounts in 2023, you could put away $6,500 in an IRA and $22,500 in your 401(k) for a combined total of $29,000.

IRAs have tax advantages

Traditional IRAs and Roth IRAs are both tax-advantaged tools that can help you prepare for a secure future.

As long as you have what qualifies as earned income per the IRS, you’re eligible to open a traditional IRA. (A spousal IRA is an exception.) However, you won’t be able to contribute to a Roth IRA if:

  • Your modified adjusted gross income for single or head of household is $144,000 (or more) in 2022. In 2023 the modified adjusted gross income limit is $153,000 (or more).
  • For married couples filing jointly, you won’t be able to contribute to a Roth IRA if your combined income is $214,000 (or more) in 2022. In 2023 the income limit is $228,000 (or more).

What’s the difference between a traditional IRA and a Roth IRA?

With a traditional IRA, you can contribute pretax dollars now and benefit from tax-deferred growth until the assets are withdrawn. If you’re not covered by a retirement program at your job, your contributions are fully tax deductible. On the other hand, if you or your spouse are covered by an employer’s retirement plan, you may only be eligible for partially tax-deductible (or non-tax deductible) contributions depending on your compensation.

Contributions to a Roth IRA, which you make with after-tax dollars, are never deductible on your tax return. However, with a Roth IRA, you get the long-term luxury of tax-free growth and tax-free income when you request a withdrawal down the road — provided you satisfy certain requirements, such as the five-year rule.

Visit irs.gov to learn more about your deduction options.

IRAs are flexible

An additional benefit of contributing to a traditional or Roth IRA is the bigger lineup of investment choices offered.

In some cases, you may have access to a wider range of investment options through an IRA than through your retirement plan at work. This may include, among others, a diverse selection of mutual funds, stocks and bonds, or annuities. With more selections, you can build a portfolio that fits your lifestyle today and the one you want tomorrow. If you don’t have the expertise or knowledge to manage your investment strategy by yourself, consider working with an advisor or taking advantage of the different advice features offered by financial services firms to help you stay on the right track.

Don’t forget, investment options, fees and advice programs may vary based upon the firm with which you open your IRA. It’s important to pick one that gives you the best opportunity to reach your goals.

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