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Although it's not hard to find doom-and-gloom articles that bemoan many Americans' lack of preparation for retirement, these don't tell the whole story.
One in three adults save for retirement outside their 401(k) in a traditional or Roth IRA, with 60% of adults reporting that they're "confident" or "somewhat confident" about achieving their desired retirement lifestyle.1 What benefits can investors realize by contributing to an IRA?
What is an IRA?
An IRA, or individual retirement account, is an independent and portable retirement savings vehicle. Unlike a 401(k) or another employer-sponsored retirement account, which usually must be held with an employer-selected custodian and invested in a range of employer-selected funds, an IRA is entirely yours to manage. This means that you can move it to any custodian and invest it in any funds you'd like. In some cases, IRAs can even be used as seed money to invest in a business.
There are two types of IRAs: Traditional and Roth. Traditional IRAs have tax-deductible contributions (with some exceptions noted below), while the money used to fund a Roth IRA is contributed post-tax. As a result, a traditional IRA can be a great way to reduce your effective tax rate (and your total tax paid), while a Roth IRA offers tax-free growth and gains.
Why Should You Invest in an IRA?
IRAs can provide a valuable addition to your retirement portfolio. While many employer-sponsored plans can leave you stuck with high fees and limited offerings, brokerage firms and other IRA custodians often offer low-fee stocks, mutual funds, index funds, and exchange-traded funds. The lower your fees, the more money reinvested into your account.
What IRA Limits Apply in 2021?
In 2021, individuals age 49 and younger can contribute up to $6,000 to a traditional or Roth IRA, while those 50 and older can contribute up to $7,000. (Investors can also contribute to both a traditional and Roth IRA so long as the total contributions don't exceed this limit).
There are some exceptions to this contribution limit. For example, if you're eligible to participate in a retirement plan at work, or if your income exceeds a certain threshold, you may not be able to deduct your total IRA contribution (which eliminates many of the incentives to contribute to such a plan). Roth IRAs are also subject to individual and household income limits -- for instance, a single filer earning less than $125,000 could contribute up to the maximum to a Roth IRA, while that same single filer earning more than $140,000 could not contribute at all.
As with any retirement savings vehicle, the most important ingredient to success is time. The sooner you open an IRA and begin contributing, the longer these funds will have to grow.
Talk to a Financial Advisor
Financial advisors with BECU Investment Services are here to help. They can assist you on your retirement journey, ensuring you are on the right track to achieving your financial goals. Set up a complimentary consultation or call 206-439-5720.
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Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 1/2 may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 1/2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
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