Individual Retirement Accounts (IRAs) are personal retirement savings accounts that offer tax benefits. While many people have access to employer-sponsored plans (such as a 401(k) or 403(b) plan), many customers still tap into IRA tax advantages to boost their savings and add flexibility to their investment portfolio.
There are two types of IRAs: Traditional IRA and Roth IRA. Both are available at Quail Creek Bank and offer different benefits based on your circumstances. Let’s take a closer look at each:
|Traditional IRA Benefits||Roth IRA Benefits|
|• No income limits to open|
• Contributions are tax deductible*
• Earnings are tax-deferred until withdrawal (when you are usually in a lower tax bracket)
• Withdrawals can begin at age 59½
• Early withdrawals are subject to penalty**
• Mandatory withdrawals begin at age 72
|• To make the maximum annual contribution, your modified adjusted gross income (MAGI) must be less than $125,000 ($198,000 for joint filers)|
• Contributions are not tax deductible
• Earnings are 100% tax-free at withdrawal
• Principal contributions can be withdrawn without penalty*
• Withdrawals on interest can begin at age 59½
• Early withdrawals on interest are subject to penalty**
• No mandatory distribution age
*Subject to some minimal conditions. Consult with a tax advisor.
**Certain exceptions apply. For example, you may withdraw up to $10,000 without penalty for healthcare expenses, higher education, or purchasing your first home. See your tax advisor for advice.
Which IRA is right for you?
Neither type of IRA is better than the other. Instead, your financial situation determines which type of account will optimize your after-tax returns. The general thought is that if you expect your taxes to be higher, you go with the Roth IRA. Conversely, if you think your taxes will be lower, you contribute to a traditional IRA and get tax savings today while you’re hopefully in a lower tax bracket later.
While most retirees’ incomes are lower than they were in their peak earning years, that isn’t universally the case. And even if your income stays the same or decreases, tax brackets may have changed by the time you retire.
You may choose a Traditional IRA if:
- You think you’ll be in a lower tax bracket during retirement.
- You don’t qualify for a Roth IRA due to income restrictions.
- You need a tax deduction for the year.
You may choose a Roth IRA if:
- You think you’ll be in a higher tax bracket during retirement.
- You’re saving for things beyond retirement, such as an emergency fund or future educational expenses.
- You’re at least 15 years from retirement and want to prepay your taxes for later.
- You don’t want to worry about paying taxes on what you withdraw from your retirement account
Saving now for retirement is what’s more important
Regardless of what you decide, your choices are less important than building a habit of saving for retirement and consistently growing your nest egg—and Quail Creek Bank can help.