When you are ready to retire – whether that’s next year or 20 years from now – will your money be ready? Preparing for retirement requires a plan, and that plan should consist of two phases: the savings years and the retirement years. To achieve the goal of a financially secure retirement for the future, you need to make wise decisions during the saving phase now.

When it comes to saving for retirement, the Individual Retirement Account (IRA) has stood the test of time, and is one of the most popular long-term investment vehicles available because it allows you to save money for retirement in a tax-advantaged way.

There are two main types of IRAs, Roth and Traditional, each with different benefits and advantages. The financial advisors at Spectrum Financial Services can help you sort through the information and determine which IRA is appropriate for your individual situation and your financial future.

When considering an IRA, your tax situation and income will help you determine which type will meet your needs. Let’s take a look at the differences between the two IRAs.

TRADITIONAL IRA (tax-deferred savings: you only pay taxes when you withdraw money from the account)
• your contributions may be tax-deductible and grow tax-deferred
• you pay taxes on the profits, plus your initial contributions (if deducted on your tax
return)
• withdrawals prior to age 59-1/2 may be subject to an IRS penalty
• total contributions cannot exceed $5,000 per year or $6,000 per year for individuals
over the age of 50 (as of 2011)

ROTH IRA (tax-exempt savings: you pay tax on the income prior to the contribution)
• your contributions are non-deductible, but grow tax-free
• you never pay taxes on your gains as long as you hold the IRA for five years and are
age 59-1/2 or older at the time of withdrawal. Nonqualified withdrawals may be
subject to income taxes and a 10 percent IRS penalty.

Savings-to-Retirement Example:

To help illustrate the information outlined above, let’s suppose Kim, age 30, is thinking about investing for her future retirement security. Even before considering her IRA options, her first smart move would be to invest in her employer’s 401(k) plan taking advantage of the company’s match. Assuming she’s already done that, let’s think about her IRA options. With a modified adjusted gross income (MAGI) of $30,000, Kim is eligible for either a tax-deductible contribution to a traditional IRA or a nondeductible contribution to a Roth IRA. To help her decide, she should consider a few key points.

1. How would Kim handle the immediate tax benefit of a traditional IRA contribution? If she chooses to invest the money she would otherwise pay in taxes, her savings could get an additional boost. But if she chooses to spend it, the deduction a traditional IRA offers may not help in building her retirement assets.

2. How soon will Kim need to access her retirement savings? Any traditional IRA withdrawals before age 59½ will be taxed as ordinary income and may also incur a 10 percent IRS penalty. So, if she expects to need access to her retirement savings before age 59½, tax-free and penalty-free access to Roth IRA contributions would probably prove valuable.

3. Will Kim’s tax bracket during retirement will be higher or lower than what it is currently? This could provide valuable insight as to which account would be better suited for her, given the taxation of traditional IRA withdrawals versus the tax-free withdrawals from a Roth IRA. In general, Roth IRAs are better if tax rates remain level or rise in the future. 

Article Key Words: Traditional IRA, Roth IRA, Retirement, Retirement Years, Saving Years, Tax-deferred, Tax Advantaged, 401(k) Tax Deduction

Get Spectrum Financial Services Involved In Your Savings-to-Retirement Plan
The savings decisions you make today will dramatically influence your retirement. Allow the financial advisors at Spectrum Financial Services to assist you in developing a new plan, or enhancing or adjusting a current savings scheme.
If you have questions about this article, or if you want to learn more about how Spectrum Financial Services can help you determine which IRA type meets your financial goals, call us at (515) 255-3306, or send us an email via the link on this website.

Specializing in retirement planning, wealth management and investment advice, Spectrum Financial Services is an experienced group of financial advisors who is here to help you achieve your financial goals.

Spectrum Financial Services is not engaged in rendering legal or tax advice. Individuals should consult with their own legal or tax advisor concerning their specific situation.

Securities and advisory services offered through VSR Financial Services, Inc., a registered investment adviser and member FINRA / SIPC. Spectrum Financial Services is independent of VSR Financial Services, Inc.