Quite possibly, the biggest mistake you can make in planning for retirement is not starting now. You may think you're too young or too old to begin and that you need to hold on to every cent to meet your present needs, but regardless of age, it's important to save for retirement. Opening an IRA can help you secure your retirement and the earlier you start setting money aside, the more you'll benefit from compounding interest. To help you understand your IRA options and see what an IRA can do for you, we're sharing what an IRA is along with types of IRA accounts.
What is An IRA?
An IRA or Individual Retirement Account is a retirement savings account offered by credit unions — like Members First — and other financial institutions. Unlike a regular savings account, IRA accounts have special tax advantages which differ based on the type of IRA account you open. Traditional and Roth are two popular types of Individual Retirement Accounts.
A Traditional IRA account (also known as the original IRA, ordinary IRA, or regular IRA) can be opened at any age. You can open and make contributions to a traditional IRA if you received taxable compensation during the year. The two main benefits of a Traditional IRA are:
- Contributions made to your Traditional IRA may be fully or partially deductible, depending on your filing status and income.
- Amounts in your Traditional IRA, including the interest earned, are not taxed until you withdraw funds or take a distribution from your IRA.
Note: You must begin minimum distributions (or withdrawals) to your Traditional IRA each year beginning with the year you turn age 72 (73 if you reach age 72 after December 31, 2022). Withdrawing funds from your traditional IRA before age 59 ½ will result in a 10% additional tax or penalty unless you meet exceptions to the early distributions tax.
A Roth IRA is similar to a Traditional IRA with the following exceptions:
- Contributions made to your Roth IRA are not tax deductible since taxes are already taken out of the principal amount when it is contributed.
- There is no limit to how long you can contribute to your Roth IRA, but there are limits to the contributions you can make to your Roth IRA based on your income and filing status. The limits typically fluctuate from year to year. Visit irs.gov for the amount of Roth IRA contributions that you can make for 2023.
- Earned interest on your Roth IRA is not tax-free until age 59 ½.
- If you meet the requirements, withdrawals or distributions from your Roth IRA are tax and penalty free. This feature is beneficial if you think you may need the money in your Roth IRA before retirement.
- There are no mandatory withdrawal guidelines on a Roth IRA, allowing your money to continue growing for longer. This also allows you to leave it in place for heirs (tax free) if you desire to do so.
- Since taxes are already taken out of the principal amount when it's contributed, you don't have to pay taxes on withdrawals from principal contributions.
Ready to Start Saving Toward Your Retirement Goals?
Our financial service representatives at Members First Credit Union of Florida are here to lend a helping hand. We'll help you get started by opening a Traditional or Roth IRA or answer any questions you may have.
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