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These days, Americans have a number of choices when it comes to saving for retirement. A few are fortunate enough to work for a company that still has a pension plan which provides retirement benefits, such as some of the larger energy companies based in Houston. In addition, many companies have 401(k) plans which allow employees to save a portion of their salary tax-free through salary reduction contributions, and many companies who have these plans will also match the employee contributions up to a certain percentage of salary. For those who don’t have 401(k) plans or who want to save additional money for retirement, an individual retirement account (IRA) may be a good option.
As discussed in a recent article in U.S. News & World Report, knowing the types of IRAs and rules regarding the different options is important when making a decision about how to invest in IRAs and how to implement them into your estate plan. There are two types of IRAs, traditional IRAs and Roth IRAs. With a traditional Roth IRA, contributions may be tax deductible. The earnings on the contributions grow tax-free and you only pay income taxes when you withdraw the money from the account. However, you cannot let the money set in the account indefinitely. With a traditional IRA, you must begin taking mandatory distributions (referred to as “required minimum distributions”) at age 70 ½.
With a Roth IRA, contributions are made with after-tax dollars, meaning that you cannot deduct the contributions from your income when you file your federal income tax return. However, the earnings grow tax-free and are not taxed when you withdraw them from the account. Additionally, there are no minimum required distributions with Roth IRAs, which means that you can let the money in the account continue to grow after you retire if you do not need the funds to live on. However, there are income restrictions with a Roth IRA. For tax year 2015, you may not be eligible to contribute to a Roth IRA if your income is greater than $131,000 ($193,000 for married couples who file jointly). For tax year 2014, the income limit is $129,000 ($191,000 for married couples who file jointly). Additionally, there is an income “phase-out” range that could affect the amount you are able to contribute to a Roth IRA. For single people, the range is from $116,000 to $131,000, and for married couples who file jointly the range is from $183,000 to $193,000.
You should speak with your financial advisor and your estate planning attorney in order to decide which type of IRA might be the best fit for your retirement and estate planning needs.
Reference: Kate Stalter, Roth IRA vs. Traditional IRA: Which Is Right for You? U.S. News and World Report, Jan. 26, 2015
