Boost Your Retirement Savings with Individual Retirement Accounts

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Give Your Retirement Savings a Boost

Give Your Retirement Savings a Boost

By: Heidi Davis, CFP®

What Are Individual Retirement Accounts?

An Individual Retirement Account, or “IRA”, is a personal savings plan that gives you tax advantages for your retirement savings.

Social Security is not designed to fund all of your retirement income. So, the IRA is an incentive by our government to help you save and control your own funds for retirement.

How Would an IRA Benefit You?

The main benefit of an IRA is that it gives your retirement savings a “boost” in its long-term growth. And the growth of your IRA is generally not taxed until after you retire. So, this may increase the value of your savings compared to savings in an account that is subject to taxes.

Contributions into an IRA may also fully or partially reduce your income, which may provide you with lower income taxes. In addition, you may be able to receive a “Retirement Savings Contribution Credit” if your income is not more than $55,500.*

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How Much Can I Save?

An IRA allows you to save up to $5,000 per year for retirement. If you are age 50 or older, you can save $6,000 per year.

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What If My Company “Matches” Retirement Savings?

If your employer offers a retirement savings plan like a 401(k) with a company match, it’s hard to beat that benefit. So after you have saved up to your company’s match amount, consider an IRA to save even more.

What Kinds of IRAs Are There?

There are three different kinds of IRAs:

Roth IRA

With a Roth IRA, you pay taxes up front on your contributions. The main benefit is that your savings and growth in this IRA are not taxed when withdrawn at retirement, which may be a substantial benefit to those starting out or in mid-career.

As an investor, you should maintain the belief that you with save the funds for at least 10 years and, in general, use the money for retirement.

Deductible IRA

This type of IRA reduces your income, generally resulting in a reduction in your taxes. The two other types of IRAs do not provide this “up front tax savings” benefit.

To qualify for this IRA, your income must be under certain “limits” if you are covered by a retirement plan at work. If you are covered by a retirement plan, then maximum income limits are $110,000 for couples. If one spouse is covered and the other is not, then the maximum income allowed is under $179,000.*

Non-Deductible IRA

A Non-Deductible IRA is helpful for taxpayers with “higher income” of $179,000 or more.

Contributions into this fund does not technically reduce your income, but you can still benefit from tax-deferred savings on the growth of your investments. Also, you may gain the flexibility to “convert” this IRA to a Roth IRA.*

To keep track of your taxed contributions into this fund, be sure to fill out the Tax Form 8606.

What Are the Drawbacks of IRAs?

IRAs are primarily meant for long-term retirement savings. If you take your money out before age 59 ½, along with some other rules*, there are penalty fees which can drastically reduce your savings.

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*For further details, see IRS Publication 590 for Individual Retirement Accounts.

Heidi Davis is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. A former commercial lender, she helps her clients with investment reviews, financial and retirement planning  issues. Contact Heidi for help with virtually any financial need.

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