Choosing an Individual Retirement Arrangement
An individual retirement arrangement (IRA) is a personal savings plan that offers specific tax benefits. Even if you're contributing to a 401(k) or other plans at work, you may want to consider investing in an IRA. The same combined contribution limit applies to all of your Roth and traditional IRAs, but each provides different tax benefits. So which IRA is better for you?
Traditional IRAs: Possible tax benefits today
Anyone who has earned income and meets all the requirements can open and contribute the maximum amount allowed each year to a traditional IRA. When considering a traditional IRA, know that:
● Your contributions to a traditional IRA may be tax-deductible on your federal income tax return, potentially saving you money in taxes in the current year of contribution.
● If neither you nor your spouse is covered by a 401(k) or another employer-sponsored plan, you can generally deduct the full amount of your annual contribution.
● If taking a distribution, you may have to pay a 10% early withdrawal penalty if you're under 59½.
● Once you turn 72, you are required to withdraw a minimum amount per year.
A traditional deductible IRA is best if you want to potentially lower your yearly tax bill while you're still working (if you qualify for tax deductions) or don't qualify to contribute to a Roth IRA.
Roth IRAs: Possible tax benefits in the future
Roth IRAs utilize after-tax contributions, meaning there is no tax benefit today, but there is in the future. When considering a Roth IRA, know that:
● You cannot deduct contributions, and your contribution amount may be limited by your annual household income and filing status.
● Funds may be withdrawn from a Roth IRA with no taxes or penalties if you hold at least 5 years from the first contribution AND meet other additional qualifying events.
● You are not required to withdraw a minimum amount from a Roth IRA, meaning you can leave more money to your beneficiaries.
A Roth IRA is best if you qualify and are less concerned about taxes today, want to minimize taxes during retirement, and plan to preserve assets for your beneficiaries.
Find the Individual Retirement Arrangement That's Right for You
IRAs are complex, with many different rules and regulations. IRAs can also be transferred from one institution to another, tax-free. Contact the Horizon Trust & Investments team to help you review which is the best IRA for your personal situation. Call (219) 873-2683.