Whether you're close to retirement after many years in the workforce or a young adult just starting your career, retirement planning can seem overwhelming. No matter your career stage, it's never too late or too early to start saving for retirement. What's most important is that you get started now to help ensure you have a financially secure future.
While there are many ways to save for retirement, such as a 401(k) or pension plan, an IRA (individual retirement account) is another type of retirement savings account with a tax advantage. Our account support and member service teams receive many questions related to IRAs, so we thought it would be helpful to share a few of those frequently asked questions and answers with help from Kristin, our member account support manager and Certified IRA Professional.
What's the difference between a Traditional IRA and a Roth IRA?
Kristin: The main difference between a Traditional IRA and a Roth IRA is the timing of their tax advantages. With Traditional IRAs, you deduct contributions now and pay taxes when you withdraw later, and with a Roth IRA, you'll pay taxes on contributions now but won't have to pay taxes on your withdrawals later. Either option can help set you up for a secure financial future during retirement.
Traditional IRA: A Traditional IRA is a retirement account that is "tax-deferred." This means you'll pay taxes on this account in the future. You may see immediate savings in the years you contribute to this account. This option provides you with immediate tax benefits. When filing your taxes, you may be able to deduct the amount you've contributed to your Traditional IRA, which could reduce your taxable income, and in turn, reduce the amount you'll owe in taxes.*
When the time comes to retire and withdraw money from your account, you will then pay taxes on any amount you withdraw. The money saved in this account can be withdrawn if you are 59 ½ years old without occurring a penalty tax. However, some exceptions allow you to withdraw from your IRA with no early withdrawal penalty.
With a Traditional IRA, you are also required to start taking annual distributions once you reach a certain age.
Roth IRA: A Roth IRA is a retirement account that is "tax-exempt." Contributions are not tax deductible, but qualified withdrawals are tax free.* Since your contributions are not tax-deductible, your taxable income will not be lowered, so you'll be paying taxes on the account upfront. This is often referred to as “after-tax” contributions.
This option provides you with future tax benefits. When the time comes to retire, you will not pay taxes on your Roth IRA withdrawals. The amount of money in the account is the amount of money you'll have access to. The funds in this account can be withdrawn if you are at least 59 ½ years old and after a five-year waiting period is over (you must wait five years after your first contribution into the account before you can withdraw without a penalty).
Unlike a Traditional IRA, there are no required distributions from a Roth IRA.
How do I choose the right option for me?
Kristin: After learning about the difference between a Traditional IRA and a Roth IRA, you may be wondering which is right for you. The main difference between the two are how and when your money is taxed. With a Traditional IRA, you delay paying any taxes until you withdraw funds from your account later in retirement, while you would pay taxes up-front with a Roth IRA. To help you decide, consider if you anticipate your tax rate to be higher or lower in the future. If you expect to be in a higher tax bracket in retirement, you may want to consider a Roth IRA. If you expect a lower tax rate in retirement, then consider a Traditional IRA.
How much can I contribute to an IRA?
Kristin: Each year, the IRS reviews inflation data and other information to determine the annual contribution limits for IRAs. The IRS also sets income limits and deduction phaseouts every year. The annual contribution limit for 2024 is $7,000, or $8,000 if you're age 50 or older. Your Roth IRA contributions may also be limited based on your filing status and income.
Can I roll over my IRA?
Kristin: If you're leaving a job and have a 401(k) or other retirement savings plan with that employer, you can easily roll over the account into an IRA. We will work directly with the employer to set up the account. You can move from one Roth account to another, as well as Traditional to Traditional tax fee. You can also move a Traditional IRA to a Roth IRA as a conversion, which is taxable. However, you cannot move a Roth IRA to a Traditional IRA.
What are "catch-up" contributions?
Kristin: If you are at least 50 years old, you can put an extra $1,000 into your IRA each year to help those close to retirement get a little extra into their accounts. However, there are income limitations that apply to Roth IRA contributions.
How do I open an IRA?
Kristin: You can open an IRA at most banks, credit unions, or other financial institutions. You must have earned income to contribute to an IRA. We offer both Traditional IRA and Roth IRA options at AllSouth. You can visit any of our locations to establish an account.
Meet Kristin, our Certified IRA Professional. She's been with us for over 14 years. She can help our members extensively with their IRAs, whether it's through answering questions, servicing accounts, or assisting with 401(k) rollovers.
*Consult your tax advisor for any tax deductions, benefits, or for any other potential tax benefits regarding IRA accounts.