Understanding IRAs

Planning for retirement is a fundamental element of ensuring financial security. An individual retirement account (IRA) is an excellent tool to help you save for the future. There are two primary types of IRAs to choose from – both have a unique set of rules. Funding an IRA can be done in a lump sum or with automatic deposits over time until the maximum IRS annual contribution limit is met. IRA contributions can be made in addition to an employer-sponsored plan like a 401(k).

Traditional IRAs

In a traditional IRA, your contributions may qualify for tax deductions, reducing your taxable income. Your earnings grow tax-deferred, meaning they accumulate without facing additional taxes until you withdraw the funds, commonly during retirement when your tax bracket is lower.

Roth IRAs

Roth IRAs do not offer tax-deductible contributions, yet the funds within them grow tax-free. As taxes have already been paid on your contributions, qualified distributions may be tax-exempt.

Which one is right for you?

When deciding between a traditional IRA and a Roth IRA, think about your current finances and expected retirement tax bracket. If you anticipate being in a higher tax bracket during retirement, consider opting for a Roth IRA for tax-free withdrawals. On the other hand, if you're in a high tax bracket now, a traditional IRA could be better for immediate tax benefits.

Factors like income limits can also impact your decision. In 2024, if you’re under age 50, you can contribute $7,000 maximum into your IRA. If you’re age 50 or over, you can contribute $8,000.

Each choice has its pros and cons, affecting your retirement funds and income in various ways depending on your financial circumstances and retirement plan.

For more information, call a member service representative at (888) 858-6878.