A traditional savings account is a fine place to store money you need access to in the next five years. We get it – cash is safe. A savings account is familiar and certainly easier to access than stocks or mutual funds. However, you risk losing out on more effective ways to produce long-term funds for retirement.
In today’s blog, we’ll explain how an IRA works, why you should add it to your financial portfolio and how to use it in a way that boosts your long-term credit union savings.
(You can also download our free guide to learn more about how to streamline your savings.)
What is an IRA?
An individual retirement account (IRA) allows you to save money while enjoying the benefits of tax-free (or tax-deferred) growth. There are three main types of IRAs and each come with their distinct advantages.
With a Traditional IRA, you can make contributions with money you’re able to deduct from your tax return. Any earnings can potentially grow tax-deferred until you withdraw them in retirement. Retirees typically find themselves in a lower tax bracket, so having the money taxed at a lower rate is helpful.
With a Roth IRA, you can make contributions with money you’ve already paid taxes on. In this strategy, your money may potentially grow tax-free with tax-free withdrawals during retirement if certain conditions are met.
With a Rollover IRA, you make contributions with money that has “rolled over” from a qualified retirement plan into a traditional IRA. Rollovers typically involved the transfer of assets from an employer-sponsored plan such as a 401(k) or 403(b) into an IRA.
Why Invest in an IRA?
Whether you choose a Traditional, Roth or Rollover IRA, the tax benefits allows your savings to exponentially grow and compound more quickly. According to AARP, you’ll need 70 to 80 percent of your pre-retirement income after you finish working – but that still may not be enough.
Some financial experts advise that you’ll need 100 percent of your pre-retirement income each year for at least 10 years after you stop working. While an employer-sponsored savings plan is helpful, it might not be enough to accumulate the savings you need. However, you can contribute to both a 401(k) and an IRA. This strategy allows you to:
- Supplement your savings
- Access a wider range of investment choices
- Take advantage of potential tax-deferred or tax-free growth
Tip: To boost your credit union savings for retirement, we recommend contributing the maximum amount to your IRA each year if possible.
A Note on Accessing Funds
A common fear we see in those considering IRAs is having their money out of reach. If you need to get to the money earlier, there are some scenarios where tax and penalty-free early withdrawals are allowed. An account like a Roth IRA can allow withdrawals of contributions at any time (though, we’d caution against this outside emergencies).
How to Save Outside a 401(k) or Standard IRA
What if you don’t have an employer-sponsored retirement savings plan? Or, don’t qualify for a deductible or Roth IRA? First, don’t lose hope. There are various types of IRAs for self-employed, small businesses and nonworking spouses. They just come with different contribution and eligibility rules.
Likewise, you can also consider a nondeductible IRA. If you have an IRA but don’t qualify to deduct your contributions, a case can still be made for contributions. Investment gains in the account still grow tax-deferred and in retirement, you only pay taxes on investment growth (not your contributions).
Or, if you’re willing to put in a little extra work, a Backdoor Roth IRA allows you to get around income limits by converting a Traditional IRA into a Roth IRA. This type of strategy gains you the benefit of tax-free withdrawals during retirement. You can read more on Backdoor Roth IRAs here.
While these alternative accounts don’t offer tax breaks, they’re better than holding onto cash into a savings account for retirement. They still give you access to your investments while offering the potential to deliver higher returns.
The worst fear of those aging is, “what if I didn’t save enough?” First and foremost, the secret to a successful savings retirement is starting early. Use the magic of compound interest to your advantage and continually look for ways to automate your savings. To learn more about IRAs and other retirement accounts, we invite you to reach out to us today at (405) 235-3030 or 1(800) 678-5363.
Want to Streamline Your Savings in 2019?
In this free guide, we highlight five high-yield and rewards-based accounts that can boost your long-term savings and bring you a step closer to reaching your financial goals. Click below to download your copy now.