When it comes to retirement planning for those living in the US, then understanding the account you should use to save is a great first step. These savings accounts a designed for your retirement funds and helps you to grow the amount so you can be sure you are supported when you need it.

What is an IRA?

An IRA is an individual retirement account with long-term, tax advantaged savings account. An Ira provides a great way to plan for retirement and enable your savings to grow. They are primarily designed for those who are self-employed and those who do not have a workplace retirement account (401(k) however, you are able to have both an IRA and a 401(k).

There are various types of IRA’s which all help you to plan for retirement and will help to maximise your saving funds. You won’t be able to withdraw your money before you are 59 ½ years old or you will be faced with a tax penalty of 10% of the amount withdrawn.

You are able to invest in a wide range of financial products including stocks, bonds, exchange-traded funds and more with certain IRA’s. The flexibility in investment choices is a huge advantage allowing you to diversify and maximise your savings.

 

Traditional IRA VS. Roth IRA

Traditional IRA

This is a tax deductible account so you can help you money go further and save for retirement. If you deposit $4000 into the account this means that your taxable income for the year will decrease by that amount.

When you withdraw money after you retire past the age of 59 ½ the amount is subject to a 10% early withdrawal penalty. There are certain exceptions including, first time home purchase, education expenses or medical emergencies.

The maximum amount you can contribute in the year 2024 is $7000 within one year and once you are 50 ½ you are eligible to contribute an additional $1000 as a catch up contribution. Your contributions are tax-deferred meaning you won’t pay tax on the money you deposit into the account

A traditional IRA is ideal for those expecting to be in a lower tax bracket during retirement, as the account allows them to delay taxes until they may be subject to lower rates. It is also a beneficial option for individuals who want to reduce their taxable income now, especially if they don’t have access to a employer plan such as a 401(k).

 

Roth IRA

This account allows you to invest your post-tax income to grow your funds for retirement. This means you can pay taxes up front and your investments grow tax-free.

The contribution limits for 2024 sits at $7000 for those under 50, those older can make contribution catch ups to the amount of $1000. This could total an annual amount of $8000 going into an account which can then grow.

If you have held the account for less than 5 years you will be able to withdraw money at any time tax free after the age of 59 ½ years old. This feature offer flexibility to those eligible for emergencies.

There are income limits such as, single filers with modified adjusted gross incomes (MAGI) over $153,000 and married coupled filing together with MAGI over $228,000 could face reduced or eliminated contribution eligibility.

This type of account it ideal for individuals who expect to be in a higher tax bracket during retirement, as this gives them the benefit of tax-free withdrawals when they need it.