You’ve heard it time and again – “You need to start saving for retirement, and you need to start as soon as possible.” And you have reached the point where you say, “Enough already! I’m convinced!”

There are different ways to save for retirement. You might be able to save with a company-sponsored 401(k) or 403(b), or perhaps an Individual Retirement Account will work for you.

While your employer will probably provide some guidance on how to participate in a 401(k), you may be on your own when it comes to an Individual Retirement Account (or “IRA”).

Let’s suppose you decide an IRA is right for you and you talk to your credit union to get started. The conversation could go something like this.

Friendly credit union rep: “Hi. How can I help you today?”

You: “Hi. I’m smarter than the average bear. I’ve decided that it would be wise for me to start saving for retirement today. I have decided that an IRA needs to be one the savings vehicles in my financial toolbox.”

CU rep: “Congratulations on your high intelligence and wisdom. I’m happy to help get you started. First, would you like to open a Traditional IRA or a Roth IRA?”

You: “Um… what?”

We can help you avoid a slack-jawed response to this question. Let’s break down a couple of the primary differences between Traditional and Roth IRAs.

Which type of IRA are you eligible to open?

Let’s start with eligibility for each IRA type.

To qualify for a Traditional IRA:

• You must be under the age of 70 ½. If you’re just getting started saving for your retirement you should have that box checked.
   
• You must have earnings from wages, salaries, tips, commissions, or bonuses. If you do, you can contribute to an IRA up to $5,500 per year or 100% of your annual earnings, whichever is the smaller amount. (If you’re 50 or older, you can contribute up to an additional $1,000.)
   
• If you don’t have earnings from employment because you take care of the home while your spouse works, you may also contribute up to $5,500 ($6,500 if 50 or older) in a Traditional IRA as long as the working spouse’s earnings are equal or greater than the combined amounts you two contribute for the year.

Now let’s look at qualifications for the Roth IRA.

• There is no age limit for a Roth IRA. You are eligible to contribute to a Roth IRA if you have earnings from employment that fit within certain limits.
   
• First, you need to estimate your “Modified Adjusted Gross Income” or MAGI. You MAGI is your total income less certain adjustments calculated on your tax return. For young savers, the most common adjustments have to do with student loan interest and educational expenses. Check out a tax form 1040 or 1040A to see which adjustments apply to you and to estimate your MAGI.

In 2018, single persons can contribute to a Roth IRA if their MAGI is $135,000 or less. Married persons filing joint can contribute to a Roth when their combined MAGI is $199,000 or below.

Consider the tax benefits of each option.

Both Traditional and Roth IRAs provide benefit when it comes to your personal income taxes. Both let you accumulate interest tax-free. But there are differences in how the principal amount you deposit is treated for tax purposes.

With a Traditional IRA, you may be eligible to deduct the amount you contribute each year from your annual income when you do your tax return. The tax savings from the deduction can be a nice way of funding a portion of the amount you put in your IRA.

In 2018, you can deduct the entire amount you put in your Traditional IRA if your income is no more than $62,000 for single filers and $99,000 for married filing joint. You may still get a partial deduction if your income is greater than these limits or if you are married but filing a separate tax return.

The tax deduction can be nice, but the tax man will still get his share when you start to withdraw from your IRA. You will have to count those withdrawals as income at that time.

A Roth IRA is different. There is no tax deduction during the year of the contribution. But you won’t pay taxes on your withdrawals when you retire.

Determining which tax advantage is right for you depends on whether or not you think your tax rate will be more now or later when you need the money in retirement. If your current earnings are probably lower than they will be when you retire, the Roth option may be best for you.

There’s more to know.

This information is just the tip of the iceberg regarding IRAs, but it should help you answer the question of which type is best for you.

Take the time to learn more about the potential tax advantages and rules of IRAs by visiting Retirement Central under the IRA section of the Genisys Credit Union website. It’s a good resource for learning about and opening your IRA. Plus, be sure to consult with a knowledgeable tax advisor when considering the income tax implications of IRAs.

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