It seems like retirement is light-years away, but it will sneak up before you know it and you shouldn't wait until it's closer to start saving for retirement. Whether you've just graduated college or are starting a family, it's important to start putting away money for retirement now. One of the best vehicles for your retirement savings is an IRA.
The individual retirement account, or IRA, is one of the most versatile retirement savings tools available. It provides the opportunity to save for retirement and offers the potential for special tax advantages, depending upon your financial situation and the type of IRA you choose.
1. Traditional IRA
A traditional IRA may afford taxpayers a reduction in taxable income since contributions are tax-deductible. However, when the person begins to withdraw IRA funds at retirement (or beginning at age 59-1/2), the funds are taxed as income.
2. Roth IRA
While contributions do not reduce taxable income, the most distinctive benefit of the Roth IRA is that it offers tax-free withdrawal of funds starting at age 59-1/2 or when the person retires, as long as certain requirements are met. This option could be good for those who anticipate being in a higher tax bracket upon retirement. The Roth has no required minimum withdrawals during the lifetime of the account owner; after death, required withdrawals apply to the account’s beneficiary. The beneficiary takes these distributions tax-free while the balance of the plan continues to grow tax-free.
3. SIMPLE IRA
The Savings Incentive Match Plan for Employees (or SIMPLE IRA) is a simplified matching employee pension plan targeted to self-employed workers and small businesses with fewer than 100 employees. The SIMPLE IRA is one of the few IRA types that are employer-sponsored, though it has features similar to a 401(k) profit-sharing plan.
4. SEP IRA
The Simplified Employee Pension IRA (SEP IRA) is ideal for self-employed individuals and small businesses. The SEP IRA is most similar to a traditional IRA, only it’s highly simplified and easier to administer.
To discuss which IRA option may be the best retirement savings vehicle for your financial situation, contact your financial advisor. If you are facing a greater tax liability this year, opening an IRA or increasing your contribution could reduce what you owe on tax day.
This information was provided by Danny McFadden, Financial Advisor at Texans Financial (972.348.2709 or Danny.McFadden@investfinancial.com).
As featured in Currents / eCurrents Summer 2012 edition
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