When most people think of long-term savings plans, they usually think about a 401(k), which helps you set aside part of your paycheck for retirement. But there's another powerful savings tool to consider, one that's flexible enough to move with you from job to job: an Individual Retirement Account, or IRA.
Think of the word "individual" as a reminder that the IRA gives you the power to make decisions on how to save. By opening an IRA with a financial institution like Regions, you can save on your own — which can be particularly helpful if you own your own business or need to shift jobs.
Another great thing about an IRA is that you can use it to roll over money from a 401(k). The rollover option is handy if you have money in a 401(k) account from a previous job.
Of course, you're not limited to having just one or the other. An IRA can serve as a supplement to your 401(k) plan as a way to diversify your long-term savings goals.
Once you have determined how much money you can afford to put into an IRA each month, you then have the flexibility to invest in mutual funds, stocks or bonds.
You'll have a lot of options for how your IRA savings should be invested, letting you balance risk and reward over the long term.
You can put money into the IRA before you pay income taxes, or you can choose to pay taxes on the money now so that you won't be taxed when you withdraw your savings in the future.
The most you can contribute in a given year to an IRA is $5,000, but if you are 50 years old or older, you can put in up to $6,000.
The Two Types of IRAs
There are two main types of IRAs: a traditional IRA and a Roth IRA, each with its own characteristics.
In a traditional IRA, contributions to the account are tax-deductible, depending on your income level. You can not remove money from the account until you are 59-1/2 years old, but you must take it out once you reach 70-1/2 years old. Taxes are paid on the account's earning at withdrawal. Any funds taken out before age 59-1/2 will incur a 10 percent penalty.
For a Roth IRA, contributions are not tax-deductible, there is no mandatory distribution age and all earnings are tax-free. Roth IRAs are only available to those who make less than a certain income: currently $120,000 if you're single or $176,000 if you're married and filing a joint tax return.
Meanwhile, a rollover IRA allows you to take control over money in a 401(k) from a previous job you left or lost. Putting that money into an IRA versus letting it sit dormant in the old account gives you better earning power and can add more money to your long-term savings goals.
One of the luxuries of an IRA is that it remains with you no matter where you work. It is important to evaluate your employer's retirement benefits, particularly if there is a contribution match, but making additional contributions to your IRA can be one of the easiest and most flexible ways to reach your long-term savings goals.
This information is general in nature, is provided for educational purposes only, and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. Regions neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.