When it comes to retirement accounts, 401(k) plans seem to hog the spotlight. They’re employer sponsored, often have an employer match, and traditional accounts are tax-deferred. Because of that, many individuals don’t look any further for additional retirement saving options.
But 401(k) plans aren’t the only thing out there in the retirement planning world – there’s such a thing as an IRA that can offer some good benefits as well.
What is an IRA?
Short for Individual Retirement Account, IRAs are a non-employer sponsored account that consumers can use to save for retirement. An IRA account can be a simple money market savings account or certificate of deposit – or it can be an investment account that you use to purchase stocks, bonds and mutual funds.
Like a 401(k), IRA accounts can be traditional, or of the Roth variety. Traditional accounts offer tax-deferred retirement savings options, while Roth accounts are built with post-tax dollars that can have tax benefits for you after you retire.
Unlike a 401(k), you don’t have to wait for your employer to offer the account to open and contribute to an IRA. Most investment advisors can set up an account for you to help meet your retirement planning needs, and many even offer automatic transfer options that make saving even easier. While some employer 401(k) plans have limits on which types of investments you can make – limiting funds, stocks, etc. – IRA accounts often offer a wider range of options to help meet your growth requirements and risk tolerance.
What’s the difference between a Roth and Traditional IRA?
Traditional IRAs are funded with pre-tax dollars, which can lower your annual income, which can then potentially lower your tax liability. Retirees are usually taxed on the money in these accounts when a withdrawal is made, and if you’re under the minimum age for withdrawals, be prepared to pay a tax penalty.
Roth IRAs are comprised of deposits made with post-tax dollars. These deposits are not deducted from your annual income, so you’re paying taxes on this money up front. However, any withdrawals made from the account (including principal and money earned) are tax-free if considered a qualified distribution. Please consult with a tax professional regarding your particular situation.
There are limits on who can contribute to a Roth account – and if you’re making more than $139,000 as a single filer for the 2020 tax year, you’re not eligible to contribute. Make sure you talk to a licensed tax professional about your contribution limits, or if you’re filing as a married couple.
Where can you open an IRA?
Most financial services firms offer some type of IRA account. Many banks or credit unions will offer a simple IRA savings or certificate account that earns a nominal interest rate on monies deposited. If you’re looking for an IRA account that will hold stocks, bonds and mutual funds, you’ll want to look for a licensed investment advisor.
Don’t automatically sign up with the first person, or account, you find. Make sure you call around and do your research.
Questions to ask:
• What limitations does this account have? Are there any funds you cannot invest in?
• What fees will I be charged?
• Is there a required term for holding this account?
• How can I get to my money if I have to withdraw it early?
• What licenses or certifications do you have?
• How often can I expect to hear from you?
Looking for a financial advisor? As a member, you have access to the financial advisors at Arizona Federal Financial Services, available through CUSO Financial Services, L.P.*. Call (602) 683-1000 to make an appointment today!
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guaranteed or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.
CUSO Financial Services, L.P. (CFS) does not provide tax or legal advice.
For such guidance, please consult your tax and/or legal advisor.