If you would like to have an enjoyable and comfortable retirement, it will take a bit of planning, which involves saving money while you are still young. An Individual Retirement Account is one way that wise individuals will sock away savings so that they can retire with a nice nest egg. When you have sufficient funds in your golden years, you can do any number of things, such as taking a long awaited vacation, visiting children and grandchildren who are hundreds of miles away, and renovating your home.
There are a variety of accounts available to provide you with a means of saving money for your future. Listed below are examples of retirement accounts, one or more of which may be just the option you need in which to save for retirement.
- Traditional: A traditional IRA will allow you to make contributions of up to $5,000 a year, $6,000 if you are 50 years of age or older. These figures are subject to change from year to year due to inflation. Your contributions can be deducted on your income taxes, and you will not be required to pay taxes on your savings until you make withdrawals.
- Roth: This type of account will enable you to make contributions with money that you have already paid taxes on. Your savings can grow tax-free. You will also not be required to pay taxes on withdrawals upon retirement as long as you meet certain requirements. As with traditional accounts, you can contribute up to $5,000 annually. The figure rises to $6,000 annually if you are 50 or older. You are eligible for a Roth account if you earn income or your spouse earns income and you file jointly as a married couple at tax time. Keep in mind, though, that if the modified adjusted gross income is $122,000 or higher for single individuals and $179,000 or higher for married individuals filing jointly, then a contribution cannot be made.
- Simple: Savings Investment Match Plans for Employees are used by small businesses and individuals who are self-employed to provide a means for employees to save for retirement. The employer will contribute a certain amount into each eligible employee’s account, and employees also contribute through salary deductions.
- Rollover IRA: This type of account is usually an old retirement plan from a former employer that can be rolled over into a new retirement account. If an individual has money left in several old employer retirement plans, the amounts can be consolidated and rolled over into another account. You have several options with this type of account. You can roll the money over into your own new account, put it into the retirement plan of your new employer, or leave the money where it is in the original account. If you decide to withdraw the savings and use it for yourself, you will need to pay taxes and applicable penalties, which will leave you with a much smaller amount.
- SEP: A Simplified Employee Pension Plan is another option for small businesses and self-employed individuals. The employer will contribute a certain percentage up to 25% into employees’ accounts, and each employee will receive the same percentage. Employees can make contributions to their own personal accounts, up to $5,000 annually or $6,000 if 50 or older. With an SEP, an employee is eligible to participate if he or she is at least 21 years of age, has worked for the employer for three of the last five years, and has earned at least $550 from the employer in the applicable year.
- Inherited: An inherited Individual Retirement Account is one that comes about through the death of an individual. You may be named as a beneficiary on your spouse’s account, or there may be another family member who leaves his or her account to you upon death. There are various ways that this type of IRA can be handled.
Only you will be able to decide which account will best fit your financial needs and goals upon retirement. There is no reason that you cannot have several accounts and receive benefits from all of them. Remember that early withdrawals will be taxable, and there is usually a 10% penalty to pay as well. You will want to invest savings in your retirement accounts that you know you will not need for a long period of time, enabling the money to grow for you without having to worry about taxes or penalties.
If you are having a hard time deciding which plan may be right for you, consulting an individual who is an expert regarding retirement plans will work to your advantage. You will want to provide for yourself and your family with the type of IRA or Individual Retirement Account that will best fit your needs for your financial future.