Getting Married > Retirement Which IRA is Right for You?

Team PV

“IRA? Sounds like the name of my parents’ old financial advisor. If a have a 401(k), do I need one of these?” 

Depends on if you’d like to retire outside of Miami or in the boonies. IRAs, or Individual Retirement Arrangements, are necessary if your company does not offer a 401(k)-type plan. If you’re already maxing out your company plan (lucky you), you might consider adding an IRA to your savings mix; and even if you’re not maxing your 401(k), you might want a wider variety of investment options than those offered in your employer-sponsored plan.

Your IRA is the Goose to your 401(k)’s Maverick. Though you’ll still get years of tax-deferred growth (and the ability to deduct those pre-tax contributions from your taxable income) here’s where these buddies differ:  

  • You contribute a maximum of $5,500 of your pre-tax income. Yes, max. Let’s hope your next gig offers up a 401(k) or 403(b).
  • Unlike your 401(k), where your company gives you their choice of funds, what you invest in is up to you, because you open your IRA account independently. You can open one through your broker, if you have one, or you can choose your favorite fund family and fill out an application- and fund it with pre-tax dollars from your salary.
  • Though you still can’t touch your savings until age 59 ½, you’re required to take minimum distributions from your IRA once you turn 70 ½. With a 401(k), however, you’ll have to take those distributions only if you’ve stopped working. And like your 401(k), you’ll still pony up to Uncle Sam when you eventually withdraw your funds.

 

If you throw Roth into the mix, you might just lose that loving feeling for Goose. And because we think everyone who can should jump on the Roth bandwagon, here’s a fun fact: The Roth IRA was created through the Taxpayer Relief Act of 1997 and named for its chief legislative sponsor, Senator William Roth of Delaware.

A Roth IRA comes with its own perks and caveats:

  • Unlike your basic IRA, you contribute funds to your Roth with your after-tax dollars. So you won’t see any tax benefits now, but you’ll enjoy tax-free withdrawals 30 to 40 years from now.
  • On the note of those withdrawals: you can withdraw funds before you turn 59 ½, but you need to have opened your account at least five years prior and you’ll duck that penalty only if you tap into your Roth’s earnings. In other words, if you need withdraw as much principal as you’ve put in, cool; but any earnings you’ve made beyond that principal, you’re out of luck.
  • Want another fun fact about your Roth? Of course you do. Roth’s other differentiator is that you’re not required to withdraw from your account when you turn 70 ½. 

 

Before you jump on the Roth bandwagon, you’ll need to verify that your startup hasn’t hit the big leagues yet: you must make under $105,000 if single or less than $167,000 if married filing jointly in order to contribute. Big catch there.

Bottom line here: if you’re young and not rolling in dough, Roth is your friend.

 

Photo: Play Among Friends

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