Retirement Accounts & IRAs!

An IRA (or individual retirement account) is an investment tool that people use to start setting aside their retirement funds. IRAs work as a type of savings account that allows you to build up your retirement savings until retirement, typically through direct deposit from your employer. In many cases, the term “IRA” refers to a traditional IRA, which is a standard savings account that lets you make deposits on a pre-tax basis, allowing for some flexibility in how the taxes on your retirement savings are calculated.

The other type of IRA, a Roth IRA offers a way to save up for retirement that calculates taxes differently than a standard (or “traditional”) IRA, which may be preferable under certain circumstances. With Roth IRAs, the money you deposit into the account is after-tax, meaning tax has already been paid on your income. This means that the money in the account can continue to grow tax-free, as well as offering tax-free withdrawals in retirement under certain conditions.

IRAs, similar to savings accounts, offer an easy way for you to deposit and collect your retirement savings as time goes by. Deposits can be made directly from your checking account/paycheck, or manually in the fashion of your choosing. These funds are typically unavailable for withdrawal until the age 59 ½, with a small number of exceptions, and are offered on a pre-tax basis.

In a traditional (non-Roth) IRA, pre-tax deposits means your deposits are made before your paycheck is adjusted for various taxes, allowing for larger initial contributions than if the deposits were already taxed beforehand. As these deposits are made pre-tax, your yearly AGI (adjusted gross income) will be decreased, meaning you may also encounter additional tax benefits over time.

This can offer several benefits in the long run, depending on your financial situation. Traditional IRAs typically benefit people who may be in a lower tax bracket after they retire, allowing you to pay lower taxes on your withdrawals after retirement than you might have while you were still working. By paying these lower taxes during retirement, you can further maximize your savings while continuing to have easy access to your money as you need it.

Roth IRAs tend to work in reverse from typical IRAs. When you make contributions into a Roth IRA, your deposits are taxed at the time you make them, which can reduce the overall amount of your contributions compared to a standard IRA. However, the money in your account isn’t taxed at any point after that, even when you withdraw your funds during retirement, which can actually help you save money in the long run if you feel like you’ll be in a higher tax bracket after retirement. Knowing when you could benefit from a Roth IRA compared to a standard IRA could really help you maximize your retirement savings in the long run.

Of the many differences between the two types of retirement accounts, the biggest one may be that a 401k can only be offered by an employer. IRAs can be opened by individuals at any time during their working career, and can offer different options for how your deposits are taxed (depending on if you open an IRA or a Roth IRA). 401ks have their contributions matched by your employer, whereas IRA contributions are only made by the individual. While you can have one of each type of account, you should research your options carefully to make sure you can find the right retirement account for you.