Saving for the future while making the right choices today.
Setting money aside for the future gets you a step closer to financial peace of mind. It may be hard to believe now, but retirement comes sooner than you think. And the sooner you start saving, the more comfortable you’ll be. For a well-planned retirement, professionals, including our own KALSEE Retirement and Investment Services*, recommend saving 20 times your desired annual income.
One way to reach your goals is to open an Individual Retirement Account (IRA). Two IRA options are traditional and Roth.
Each plan offers unique benefits that serve different purposes. Which plan you choose largely depends upon your financial goals. For either, your maximum contribution per year is $5,500 of earned income. Double that if you’re married and your spouse has earned at least $5,500. If you’re age 50 or older, the amount increases to $6,500.
From here, the similarities end.
It’s essential to understand the differences between a traditional and Roth IRA and to match the right product to your needs. Specifics to consider are your age, short and long-range goals, tax burden, and tolerance for risk.
The most distinguishing feature is your ability to make pre-tax contributions, reducing your taxable income. You’ll save money on your taxes today while building your nest egg for the future. And reducing your tax burden is no small matter.
Consider this example:
Annually, you and your spouse earn $80,000 in total taxable income. You’re both eligible to contribute the maximum amount, $5,500, to an IRA, totaling $11,000. This figure directly reduces your taxable income to $69,000 and lowers your tax burden.
Sometimes called “payouts,” withdrawals from a traditional IRA can begin without penalty at age 59 ½. Since you haven’t paid taxes on the money, withdrawals will be taxed at your current income rate, which may be lower as you age. You’ll want to avoid making early withdrawals (before age 59 ½); they are assessed a 10 percent penalty by the IRS and taxed at your current rate.
You can, however, make contributions and garner a potential tax deduction until the year you reach age 70 ½. The deadline to make a qualifying contribution for the 2017 tax season is April 18th.
One of the most flexible tax-sheltered plans, tax-free asset growth and tax-free withdrawals are primary features of a Roth IRA. There are no age restrictions as to when you can withdraw from the account, and, since you’ve already paid taxes, withdrawals are tax-free.
And because you can make qualified withdrawals (or distributions) at any time, a Roth IRA can be used to save for a special purpose – including college. But if that reason doesn’t pan out (i.e. you don’t need the funds for college after all), you can shift the money towards retirement instead – without the fees of a 529 plan (Education Savings Account).
It’s important to note that while earnings grow tax-free, contributions to your Roth do not reduce your taxable income and are not tax deductible. (Different from a traditional IRA.) Still, some consider the Roth one of the most versatile plans available. For example, the Wall Street Journal highlights that Roth owners aren’t required to make withdrawals during their lifetime at all. By contrast, owners of traditional IRAs must make withdrawals after age 70½ that deplete the account, taxable at ordinary income rates.
Keep your eye on the future.
KALSEE’s Retirement and Investment Services* offers both traditional and Roth IRAs. Both are terrific options to help you prepare for the future. If you need help navigating your choices, talk with our Investment Services team. Call 269.382.7898 to schedule a no-cost, no-obligation consultation. We can outline the benefits of each and assist in clarifying your retirement goals.
For details on how an IRA can impact on your personal tax situation, please consult your tax advisor.
*Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. FR-1696296.1-0117-0219.