IRAs are a tax-advantaged way to save for retirement. Finding the best IRA for you depends on your financial objectives, income level, length of time before retirement and more. Advantages of IRAs include:
Earnings are tax-deferred ― interest earned is not taxed until withdrawn.
You control the investment options within your IRA.
You decide how much to contribute, up to set limits, each year.1
If you’re 50 or older, you may be eligible for catch-up contributions of an additional $1,000. You may withdraw funds anytime; however, early withdrawal penalties may apply.2
There are two main types of IRAs — Traditional or Roth — and each have different tax implications. Here’s how the two stack up:
Traditional IRA
You must be under age 70½ and have earned compensation,3 to be eligible to contribute to a Traditional IRA. The tax-deductibility of your contribution depends on your circumstances.
Tax-deductible contributions — Your IRA contributions may be tax-deductible if you are not active in an employer-sponsored plan. If you are involved in an employer-sponsored retirement plan and meet certain income requirements, you still may be eligible for tax-deductible contributions. Since a Traditional IRA provides a tax deduction in the year that funds are contributed, you will pay income tax at the time you start to withdraw the money, making it most favorable if you expect your income-tax bracket to be lower at retirement.
Non-deductible contributions — If you do not qualify for a tax deduction, you may still benefit from contributing to your IRA as your earnings are tax-deferred. In addition, by not deducting these contributions on your tax return, you pay taxes on non-deductible IRA contributions in the year the money is contributed. This means you do not pay taxes on these amounts when withdrawing them from your IRA.
You may withdraw your money from a Traditional IRA whenever you wish; however, early withdrawal penalties may apply if you are younger than age 59½. Penalty-free withdrawals before age 59½ can be taken for first-time home purchases, qualifying educational or medical expenses, disability or death.
At retirement, all withdrawals from deductible IRAs are taxed as ordinary income. Withdrawals from non-deductible IRAs ― not including earnings — are not taxed at the time of distribution. Minimum distributions for your IRA must begin by April 1 of the year you attain age 70½, even if you are not retired.
Roth IRA
The Roth IRA provides no income tax deduction for contributions, but earnings grow tax-deferred and may be withdrawn tax-free if the plan has been established for at least five years and you are age 59½ or older.
You and your working spouse may contribute to a Roth IRA at any age, up to certain income levels. You can continue to contribute to the IRA after age 70½ if you still receive compensation, and you are not required to begin taking distributions at age 70½.
A Roth IRA can be a good fit for those who expect to be in a high tax bracket after retirement and have maxed out other retirement plans. Since there are no taxes during the accumulation phase, assets can grow faster and distributions at retirement are tax-free.
Compare Traditional to Roth IRAs to find the best IRA for you. Farm Bureau can help you get started. Find a local agent now.
1 You may contribute $5,000 in 2008 or 100 percent of your earned income, whichever is less, each year. Contribution limits are subject to tax law changes. Contributions must be made before your tax return filing date, excluding extensions (generally April 15).
2 Consult your tax adviser before making early withdrawals from an IRA
3 For purposes of IRA contributions, compensation includes wages, salary, professional fees and other amounts received for personal services and alimony.