4 benefits of an IRA

Planning for retirement

When it comes to saving for retirement, you might already be on your way with automatic contributions into a 401(k) account. But that’s not your only retirement account option.

An individual retirement account (IRA) offers a unique way to save for the future. You can choose a traditional IRA, a Roth IRA or work with both. If you’re self-employed or own a small business, you have even more IRA options. And the best part? All IRAs give you a leg up when it comes to funding a healthy retirement.

Here are four benefits of a traditional or Roth IRA.

1. IRAs are accessible and easy to set up

Most people are eligible to open and contribute to an IRA.

  • To open and make contributions to a traditional IRA, you (or your spouse) just need to earn taxable income.
  • There’s no age limit for opening or contributing to a Roth IRA, but your ability to contribute may be reduced based on your tax filing status and the amount of your modified adjusted gross income.
  • You can open an IRA through many banks or brokerage firms in a matter of minutes. And most financial institutions make managing your account easy to do.
  • You can manage your investments on your own or work with a financial professional to help guide your strategy. You can also choose an automated approach, where your investments are automatically monitored and rebalanced to help you meet your goals.

2. Take advantage of a traditional IRA tax break right now

Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won’t pay taxes on your untaxed earning or contributions until you’re required to start taking distributions at age 72. With traditional IRAs, you’re investing more upfront than you would with a typical brokerage account, and the more you invest now (and over the years) the more you may have to withdraw when you’re ready to retire.

Plus, if your goal is to reduce your taxable income, take note: If you contribute up to $6,000 (or $7,000 if you’re 50 or over) in deductible contributions, your taxable income may be lowered by that amount.

3. Or defer your Roth IRA tax break until retirement

While a traditional IRA may yield an upfront tax break, a Roth IRA hands you that perk when you’re ready to retire. Since you contribute after-tax dollars, your earnings and withdrawals are not taxed in retirement. That’s a serious advantage to investors — particularly those who start saving in their 20s or 30s.

“A Roth IRA has the benefit of providing tax-free distributions in retirement,” says Wendy Kelley, national IRA product manager at U.S. Bank. “And it’s one of the best retirement options for young people because you have the potential to compound tax-free funds over your working years.”

If flexibility is a priority, a Roth IRA might be best for you. With tax-free withdrawals in retirement, no required minimum distributions and the ability to withdraw your contributions at any time, Roth IRAs make cashing out easy. (Just keep in mind that your combined contribution to traditional and Roth IRAs is capped each year at $6,000, or $7,000 if you’re age 50 or older.)

4. Your IRA is exclusively yours

In 2019, the Bureau of Labor Statistics reported that just 60 percent of Americans have access to an employer-sponsored retirement plan like a 401(k). Even if you do have one, an IRA lets you sidestep some 401(k) pitfalls.

For example, with a 401(k), you’re merely a participant — not an owner. So your employer can change plans or limit your plan’s investment options without your say-so. And, leaving your job means losing the ability to contribute further to that 401(k).

An IRA, however, is yours to keep. Your access is unchanged if you ever switch jobs, and you can even rollover those old 401(k) funds into your IRA. And quality IRAs offer you thousands of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs) and more. “Some employer-qualified plans may limit the available investment opportunities,” notes Kelley. “When investing in an IRA, you may have more options and control for putting your dollars to work.”

With an IRA of your own, you can customize your portfolio to work with your financial needs, risk profile and retirement goals.

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Learn about opening an IRA

A rollover of qualified plan assets into an IRA is not your only option. Before deciding whether to keep an existing plan, or roll assets into an IRA, be sure to consider potential benefits and limitations of all options. These include total fees and expenses, range of investment options available, penalty-free withdrawals, availability of services, protection from creditors, RMD planning, and taxation of employer stock. Discuss rollover options with your tax advisor for tax considerations.