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Need help choosing the
IRA that's right for you? Use our
online tool to identify the type of IRA you might want to consider based on your adjusted gross income and the tax benefits provided. |
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How do you envision spending your retirement? Do you
have a dream to travel the world, join a country club, or
enjoy your ocean view from your patio that has kept you
working all these years? Either way, you'll need to plan
ahead to make sure you can fund it. Fortunately, Uncle Sam
recognizes several different retirement options that let your
earnings grow tax-deferred or tax-free. Take advantage of as
many of these as appropriate.
No matter which of the tax-advantaged investments you
choose, the key is to start early. Because the sooner you
begin investing, the better your chances of reaching the
finish line with enough cash to live the retirement you've
always dreamed you'd enjoy.
If you have an employer-sponsored plan, use it.
Many employers now offer what are called defined
contribution plans, such as a 401(k) or 403(b) plan. If your
employer offers one of these plans, sign up and contribute
as soon as you can. This way, the amount you invest is
deducted from your income before taxes and grows taxdeferred
until you withdraw it. Many employers also provide
a matching program, meaning the employer contributes
additional funds toward your account. If your employer
matches some or all of your contributions, put in at least
the amount your employer will match so you can make
the most of this benefit.
Contribute to an IRA.
Before contributing beyond your employer's match in a 401(k), you'll want to evaluate the tax
benefits of IRAs. They often provide more choice and control
over your investments than a defined contribution plan. The following chart outlines four IRA options that you may be eligible for.
Who's Eligible |
Advantages |
Annual Contribution Limits |
Contribution Deductible? |
Penalties |
| Traditional IRA |
| Individuals and their spouses
under the age of 70½ with
earned income. |
Tax-deferred growth.
Possible federal income
tax deduction. |
Contributions per person may
not exceed $5,000 ($6,000 for
those age 50 or over) or 100%
of earned income, whichever
is less. |
Yes, for some investors.
Click here to
determine eligibility. |
Withdrawals made before age
59½ may be subject to income
tax and a 10% penalty.
Earlier withdrawals may
be penalty-free for buying
a first home or another
qualified reason. |
| Roth IRA |
| Individuals and their spouses of
any age with earned income.
Adjusted gross income cannot
exceed $120,000 (single) or
$176,000 (joint). |
Earnings are tax-free when you
follow legal guidelines.
Contributions may be withdrawn
tax- and penalty-free at any time.
However, once you withdraw,
you cannot recontribute for
prior years. |
Contributions per person may
not exceed $5,000 ($6,000 for
those age 50 or over) or 100%
of earned income, whichever
is less.
Smaller limits may apply
for persons with income
above $105,000 (single) or
$166,000 (joint). |
Not deductible. |
Same as Traditional IRA, except
withdrawals of contributions
are not penalized. Withdrawals
of earnings before age 59½ may
be subject to penalties. |
| Rollover IRA |
| Individuals with a retirement
plan such as a 401(k) or 403(b)
from a previous employer. |
Usually provides more
investment choices than an
employer's plan.
Avoids penalties and taxes from
cashing out a retirement plan. |
No limit for transfers from other
retirement accounts.
You can contribute annually
and use your Rollover IRA as a
contributory IRA for subsequent
years, managing all retirement
assets with one statement. |
Not deductible. |
Same as Traditional IRA. |
| SEP IRA
(Simplified Employee
Pension) |
| Anyone who's self-employed
or employed by a business that
offers a SEP IRA. |
Contributions may be
deductible from business taxes.
Tax-deferred growth
on contributions.
Contributions do not impact
ability to contribute to a
Traditional or Roth IRA. |
Employers can contribute
up to 25% of employees'
compensation each year, not to
exceed $49,000 per individual.
Employees are not allowed to
make contributions to a SEP IRA. |
Contributions are not included
in an employee's gross income
on IRS Form W-2. |
Same as Traditional IRA. |
Things to consider – Roth IRA or Traditional IRA?
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You must take a required minimum distribution (RMD) by age
70½ in a Traditional IRA. Roth IRAs have no RMD and may be a
better option for investors who plan to continue working and
won't need to tap into this investment by that time. Also, if
you plan to live on other sources of income, such as a pension
or Social Security, and won't need your IRA money for a while,
it might make sense to continue to let it grow tax-free in a
Roth IRA past age 70½.
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There are no age restrictions to contribute to a Roth IRA as
long as you have earned income. If you're over age 70½, you
can continue to contribute and allow your investments to
grow tax-free. Traditional IRAs do not allow you to contribute
after age 70½.
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If you need a current-year tax deduction, you can't get it from
a Roth IRA. Rely on a Traditional IRA.
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Consider a spousal IRA if your wife or husband is not employed.
A nonworking spouse can make a deductible IRA contribution if the couple files a joint return, and the working spouse has enough earned income to cover the contribution (phase-out restrictions apply). This is a great way for a non-working spouse to continue planning for their future.
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If your children are employed, encourage them to open an IRA by
matching their contributions. This not only can help encourage them
to become investors, but it also gives them the potential for years of
compounded growth.
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