The Individual Retirement Account, or IRA, was created specifically to encourage Americans to save for their retirement. This tax savings tool should be part of everyone’s retirement plan.
If you don’t already have an IRA, whether a traditional IRA or a Roth IRA, you are missing out on some real tax savings. A recent article in madison.com, “5 Things You Should Know about IRAs,” gives a great overview of this popular retirement savings vehicle. IRAs are a great way for individuals to save money for retirement at the same time that it provides tax advantages.
There are two main types of IRAs: traditional and Roth. Contributions made to a traditional IRA may be deductible or non-deductible, and all contributions made to a Roth are non-deductible. Both types of IRA accounts allow money to grow tax-deferred for many years. After age 59½, you can start taking qualified distributions. You’ll typically have to pay income tax on withdrawals from a traditional IRA, but withdrawals from a Roth are tax-free. Here’s what you need to know about IRAs:
- Saving for retirement is a solo job, at least when you’re putting money in a tax-sheltered retirement account. An IRA can only have one owner.
- IRAs have their own beneficiary designations, so who will inherit an IRA is based on who’s on the account's beneficiary forms—not what’s in a will, trust or any other estate document. Therefore, when you open an IRA, name a beneficiary and remember to review and update the beneficiary designation form regularly, particularly when you have a life event, such as marriage or a child.
- You have until Tax Day to make your IRA contribution for the last year. If you can't make a lump-sum contribution at the start of every year (giving your money added months to compound), you can spread your contributions over a 15-month period, from January until the following March to help you reach the annual contribution limit each year.
- You typically must have your own taxable compensation to fund an IRA ( although a working spouse can fund a non-working spouse's IRA.) However, you don't have to use your own money to make your IRA contribution.
- If over the years you find yourself with a group of IRAs from various jobs, it is considered a savvy move to roll them all into one IRA to improve your ability to manage the money. You’ll still be able to make direct contributions and you’ll cut down on the paperwork.
Retirement arrives before you know it. Be prepared so that you’ll have more flexibility and resources when the time comes!
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