Individual Retirement Accounts (IRAs)
For many people, an individual retirement account (IRA) is the best tool available to prepare for financial needs later in life. An IRA is an account that allows you to save for retirement while enjoying substantial tax advantages. IRAs allow you to choose from a full array of investment options, including stocks, bonds, options, ETFs, and mutual funds.
People are living longer in retirement than they used to, medical expenses are rising faster than the rate of inflation, and long-term elder care in particular has become a heavy financial burden for many families. Rollins Financial can help you and your family plan for a seamless transition, with financial peace of mind, to retirement.
The traditional IRA was made available to American workers by congress in 1975. Fewer employers were offering retirement options such as pensions and social security, while a great benefit to many elders, really only provides enough income to hedge against extreme poverty in retirement. The Roth IRA was created by the Taxpayer Relief Act of 1997, providing more flexibility to families.
IRAs are a great way to supplement the income generated from Social Security and any employer-sponsored retirement plan you have. They are easy to establish and the many financial products available within IRAs offer participants a great deal of flexibility.
There are different kinds of IRAs—traditional, Roth, SEP (Simplified Employee Pension), and Inherited—each offering its own unique advantages. Rollins Financial’s tax and investment experts will walk you through the ins and outs of each, and help you choose the account that’s best suited to your income, retirement goals, and individual needs.
Traditional IRA: In a traditional IRA, taxes on contributions are deferred until you actually withdraw your money. Since most retirees withdraw IRA funds in lower tax brackets than they would have while working, this can amount to significant tax savings. Taxpayers may deduct contributions to a traditional IRA if they meet certain conditions. If either the taxpayer or spouse was covered by a work-provided retirement plan during the tax year in question, the deduction may be reduced, phased out, or eliminated, depending on filing status and income.
Traditional IRAs offer you a great deal of investment flexibility. They typically allow users to choose any investment option that is available in a standard investment account, including common or preferred stocks, bonds, mutual funds, certificates of deposit(CDs), and exchange traded funds(ETFs).
For tax year 2019, you many contribute up to $6000 annually into a traditional or a Roth IRA, and $7000 if you are over the age of 50. Anyone with earned income may continue making contributions until the age of 70 1/2. Withdrawals prior to the age of 59 1/2 are penalized, so there is a built-in financial incentive to preserve your IRA funds until retirement. Taxes on capital gains, interest, and dividends are deferred, which makes IRAs more tax efficient than an after-tax account. You pay no taxes until funds are withdrawn.
Roth IRA: A Roth IRA is an investment vehicle that allows you to put after-tax income into an investment account and grow that money through investing over time without ever having to pay income tax on the compounding profits you make in the account. Roth IRAs eliminate any uncertainty about income tax rates upon dispersal. Provided you wait until age 59 ½ you will not have to pay any taxes. This can add up to decades of tax-exempt compounded returns.
Because Roth IRAs are funded with post-tax dollars, they have a higher effective contribution limit than other IRAs. Principal, or direct contributions to a Roth IRA can be withdrawn without penalty at any time. Earnings can be withdrawn without penalty provided the funds have been invested for five years and the account holder is at least 59 ½.
Roth IRAs offer a distinct estate planning advantage over all other tax-deferred retirement plans. They do not require distributions based on age. If a Roth holder does not need the money, they can leave the account intact past the age of 70 ½ and continue accruing tax-free income. Roth IRAs can be willed, fully funded, to beneficiaries, who are then subject to normal distribution rules.
Simplified Employee Pension(SEP) IRA: A SEP IRA can be utilized by self-employed individuals or small business owners as a means of providing retirement benefits for themselves and their employees. Funds in a SEP IRA can be invested in the same wide array of financial products that are typically available in IRAs. If a SEP is being used to provide retirement benefits for employees, all those employees must receive the same benefits.
For tax purposes, SEP IRAs function like traditional IRAs. Withdrawals after the age of 59 ½ are taxed at ordinary income tax rates, and SEP contributions for an individual or a small business owner are tax deductible, lowering tax liability by the full amount of the contributions for the year.