Know Your Options

You may be just starting to save for retirement.  Or perhaps you’re looking for a way to add to what you’ve already saved, say, in an employer-sponsored retirement plan (such as a 401K).  Whatever your situation, you’ve made a wise choice to invest in your future.  After all, Social Security may only provide about 40% of the average wage earner’s income in retirement.  So that puts more of a burden on each of us to come up with the rest of what we need.

IRA’s not only offer you flexibility in choosing what type of investments you want, but there are also tax benefits that vary depending on the type of IRA that you choose.

  1. Traditional IRAs offer you the benefit of tax-deferred growth, meaning you won’t pay taxes on your account until you withdraw the money.  You may qualify for a full or partial deduction of your IRA contributions on your tax return, but that depends on your income, (MAGI).
  2. Roth IRAs offer you the benefit of tax-exempt growth.  If eligible, you make contributions after you’ve paid federal income taxes, so you won’t have to pay taxes again on your investment when you withdraw the money.

To ensure the retirement plan you choose is the right one for you, it is important that you understand your options.  Here is a quick rundown on the pros and cons of each:

Traditional IRA –

  • Pros
    • IRA grows tax-deferred
    • May be able to reduce your current income tax liability
    • Penalty-free withdrawals are available before you reach age 59 ½  under some circumstances
  • Cons
    • You have to stop making contributions at age 70 ½
    • Not everyone qualifies for a tax deduction
    • The entire value of the IRA is taxable on distributions

Roth IRA –

  • Pros
    • Earnings in your Roth grow tax-deferred and maybe tax-free if there are qualified distributions
    • You might be able to continue making Roth contributions for as long as you want regardless of your age.
    • You are never required to take withdrawals from your Roth IRA
  • Cons
    • Your heirs will have to take distributions
    • Not everyone qualifies for Roth IRAs

Opening an IRA is fairly straight forward but you want to make sure to work with a financial professional in order to determine your eligibility and help you make an informed decision on what option is the best for you.


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