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IRAs: Understanding Retirement Saving Options

By: American Heritage02.22.24
Mature couple meeting with a financial advisor in their home

Retirement is the long-awaited reward after a life of hard work—a time to devote to yourself, your loved ones, and your dreams. An individual retirement account can be an essential tool in your retirement savings strategy, helping ensure your finances can support you throughout your golden years.

The two most popular IRA types—traditional and Roth—offer unique benefits suited for different situations. To make sure your retirement savings strategy is at its strongest, you must choose the account that best meets your needs.


Understanding IRAs: The Basics

IRAs are tax-advantaged savings accounts designed specifically to encourage and help individuals to save for retirement. Unlike employer-sponsored plans such as 401(k)s, IRAs can be opened by anyone with earned income. Because of this, they are especially popular with individuals who don’t have access to workplace retirement plans, like those who are self-employed. Individuals might also open an IRA to supplement their 401(k), maximizing their retirement contributions.


IRA Insights:

  • IRAs have annual contribution limits—a set cap on the total amount of money an individual can deposit in IRAs per year. You can check the latest contribution limits published by the IRS.
  • Those aged 50 and older can make catch-up contributions slightly beyond the standard limit to accelerate their savings as they near retirement.
  • The diverse investment options available with IRAs, ranging from stocks and bonds to IRA certificates, allow for easy scalability and customization in accordance with your risk tolerance and retirement timeline.


Traditional IRAs: Immediate Incentives

Traditional IRAs offer potentially tax-deductible contributions and tax-deferred growth, so your finances get a small boost now while still being protected in the future. Typically, you don’t have to pay taxes on the money you contribute to the account, so it helps reduce your tax liability. You also don’t pay taxes on the growth your account experiences until you withdraw the funds in retirement.


IRA Insights:

  • You may have to pay taxes on money contributed to a traditional IRA if you have a workplace retirement plan or high income. The deductibility of traditional IRA contributions may be limited if a retirement plan at work covers you or if your and your spouse’s income exceeds certain levels.
  • When you begin taking distributions in retirement, the funds will be taxed as normal income.
  • You must take required minimum distributions (RMDs) at age 72. This means you must withdraw a certain amount of money from your traditional IRA account each year.


Roth IRAs: Deferred Benefits

On the other hand, Roth IRAs are funded with after-tax dollars. Because you paid taxes on the money before contributing it to the account, your qualified distributions in retirement aren’t taxed as income and neither are the account’s earnings.


IRA Insights:

  • Income limits apply to Roth IRAs, with the amount you can contribute decreasing as your income increases. Your marital status and living situation will also influence the amount you’re able to contribute.
  • You can make tax- and penalty-free withdrawals even before retirement, up to the amount you have contributed to the account. (This does not include earnings.)
  • Roth IRAs do not have RMDs, so you have more control over your cash flow and reserves in retirement.


Making the Right Choice

All of this information is good to know, but how does it apply to you? How do you know which account will benefit your retirement savings strategy the most? The answer will depend on your current financial situation, goals, and anticipated income and tax bracket in retirement.


A traditional IRA might be best for you if:

  • You anticipate having a lower income during retirement than you do right now. (This is true for the average person.)
  • You want or need to reduce your current personal tax liability to have more available cash.
  • Your income and other factors fall within the limits needed for tax-free contributions.


A Roth IRA might be best for you if:

  • You are reasonably confident that your retirement income will be higher than your current income.
  • You want the flexibility to take qualified early withdrawals without penalty or taxation.
  • You can comfortably pay your current tax rate and want to minimize the deductions from your income in retirement.


Additional Insights

IRAs can be valuable tools in a well-rounded retirement strategy. Developing a deep understanding of the nuances of traditional and Roth IRAs can help you get even more from these accounts, empowering you to sharpen your strategy. A few last insights to keep in mind as you consider retirement:

  • IRA certificates are low-risk, stable investment options within IRAs that typically offer higher earnings than regular savings accounts. You invest some of your IRA funds into a share certificate for a set term of your choosing. Your rate is locked in for the life of the certificate, so your earnings are guaranteed and predictable. They can be a wise way to diversify your portfolio or an excellent option if you need relatively safe investments.
  • You can open both IRA types to maximize your retirement contributions. Doing so helps diversify and balance your income and tax liability now and in retirement, offering the best of both worlds. Keep in mind that while opening both types of IRAs can offer flexibility, contribution limits apply across all IRA accounts.
  • Consult a tax or financial advisor to ensure that your strategy makes sense for your situation and goals and that you know all implications of your savings tools.
  • Open your IRA before you file your tax return! This is imperative if you want the tax advantages of these accounts to apply to your current tax return. Plus, the sooner you open the account, the more time your savings have to grow.


Forming a Fruitful Future, Together.

While any kind of savings is better than none, choosing the right IRA is vital to building the retirement of your dreams. When you choose a retirement account that aligns with your situation, strategy, and goals, you can accelerate your savings and maximize your retirement finances.

American Heritage Credit Union is a steadfast partner in cultivating bright, fruitful futures for our members. With comprehensive IRA options that include IRA certificates, plus savvy financial advisors ready to serve you, we offer valuable products and services designed to drive our members’ success. Explore our Investment & Retirement Center  online, and reach out to schedule a consultation.



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