Choosing the right IRA account requires some planning. There are several types of IRA accounts such as traditional, Roth, SIMPLE and SEPs . Whether you have an existing IRA or are eager to set up a new one, selecting the right IRA depends upon your income, your existing retirement accounts, marital status, age, your expected future tax bracket, whether or not you own your own business, and how you get paid by your employer or yourself if you own your own business.
What is an IRA?
In simple terms, an IRA is a tax-advantaged retirement savings account for people who have earned income, that enables them to put aside a certain amount of money per year and reap tax advantages.
IRAs can be used in addition to a 401(k) or other employer-sponsored retirement plan. If you have an existing 401(k) plan, you can also roll it over to an IRA
Annual Contribution Limit
You are eligible to have more than one IRA but the annual contribution limit across ALL account is $5,500 if you’re under age 50, and $6,500 if you’re 50 or older. There are two types of IRAs:
1) Traditional IRA 2) Roth IRA
Each kind has its own guidelines and tax advantages.
In a traditional IRA, contributions can be tax-deductible. Growth is tax-deferred. Tax is only paid upon withdrawal in retirement.
In a Roth IRA, contributions are not tax-deductible, but qualified withdrawals and growth are tax-free.
Choosing the right IRA does involve some planning as you can qualify for multiple account types depending upon your age, income and contributions to other retirement accounts. In deciding between account types, knowing the difference between your current and future tax bracket also have an impact on your selection. Depending upon your individual situation, it may be helpful to implement advanced IRA planning to extract additional tax benefits through conversion between different types of IRAs.
Often the qualifying rules for IRAs are misunderstood. It is important to have some information handy to make the best decision for you. This includes:
- Income Filing Status
- Tax Year to assign your contribution
- Your Age by the end of the tax year
- How much you will save in IRA accounts this year
- Your pre-tax annual income
- If your employer offers a retirement plan such as a 401(k), 403b plan
- Your expected tax rate at retirement
For example, a single 35-year-old person whose pre-tax income is $50,000 and does not have a retirement plan via their employer and can save up to $5,500 for the 2015 year, could invest in both a Roth IRA and a traditional IRA deductible at $2,750 each.
This investment approach of an equal amount in a Roth IRA and traditional IRA is suitable because the future tax rate is likely similar to the current rate. Having both pre-tax and post-tax accounts also can help in controlling income and taxes in retirement.
At VFF, we can assist you in reviewing your existing retirement savings accounts and your goals to ensure you are on track to live comfortably as you intended into retirement. We can work with you to develop and add new accounts, ranging from IRAs to covered call stock options, inverse ETFs and other aspects of our versatile, money management approach.