First of all, what the heck is an IRA anyway? An IRA is an individual retirement account that offers an easy way to save for your retirement. There are tax advantages, too, since contributions to some IRA accounts may be tax-deductible or withdrawals may be tax-free. You can make deposits any time, up to the government limits.
Two of the most common types of IRA accounts are traditional and Roth IRAs, and there are advantages and disadvantages to both. We’re always here to help you learn more about IRAs and IRA account rates, and help decide which type is best for you.
Why should I open an IRA account?
IRAs can be a great supplement to a 401(k) or pension, and adding money to an IRA can help prepare for retirement, save on taxes, and complement investment options that your workplace retirement plan may not cover.
Traditional IRA account benefits and disadvantages
Traditional IRA accounts often offer tax-deductible contributions based on your income. This makes them a good option if you are looking to lower your taxable income. In practice, if you contribute $6,000 to a traditional IRA, you could reduce the amount of your taxable income for the year by $6,000.
A good thing to keep in mind is that while contributions are tax-free, you will likely pay taxes on your withdrawals. This can mean that you will pay taxes on a larger amount of money as time goes on since your money will grow after you invest it. However, you may be paying at a lower tax rate by the time you withdraw because you will likely be earning less once you are retired.
Roth IRA account benefits and disadvantages
Roth IRA accounts are taxed on contributions and not on withdrawals (as with traditional IRAs), and they come with higher income thresholds. In terms of taxes, this means that a Roth IRA does not lower your taxable income, though it does allow you to pay taxes on a smaller sum of money since you are paying on your contributions instead of your withdrawals— which are larger as the investment has grown over time. This makes a Roth IRA a good option for long-term tax advantages. Also, note that there are some situations where you wouldn’t pay taxes on the withdrawals, such as if you are 59½ years old (or older) at the time of your withdrawal.
In terms of the drawbacks, contributions to Roth IRAs are not tax-deductible so will not reduce your taxable income right now. Another thing to consider is that there are income limits on who can contribute to a Roth IRA. This is based on your modified adjusted gross income (MAGI), depending on tax-filing status.
How many IRA accounts can you have?
There’s no limit to the number of IRA accounts you can have. No matter how many accounts you have, though, your total contributions cannot exceed $6,000 per year if you are under 50, and $7,000 per year if you are 50 or older (for 2021).
Roth vs traditional IRA: Choosing the best IRA for you
To choose which IRA account type is best for you, you’ll want to consider your income as it relates to the income cap (based on things like age, marital status, etc.), and when you would like to be taxed on your funds— either when you make a contribution or when you make a withdrawal. It is important to look at the long-term picture and consider factors like which type of institution to open your account. For example, bank or credit union IRAs generally offer more security, while investment firm IRAs generally offer more growth opportunities. Each situation is slightly different and it definitely helps to talk to your financial adviser or accountant to make the right choice for you and your finances.
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