When most people think of long-term savings plans, they usually think about employer-sponsored retirement plans, such as a 401(k) plan, which sets aside funds for retirement. But there's another powerful savings tool to consider that moves 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, you can save on your own without having to rely on an employer to offer a plan.
Another great aspect about an IRA is that you can rollover money from certain employer-sponsored retirement plans, such as a 401(k) plan, into an IRA and generally not pay tax on the amount rolled over. This rollover option is handy if you have money in a retirement plan from a previous job. Of course, you're not limited to having just one or the other. An IRA can supplement your savings in an employer-sponsored retirement plan and help you to diversify your long-term savings.
Funds contributed to an IRA can be invested in mutual funds, stocks, and bonds. You have options for how your IRA savings are invested, letting you balance risk and reward over the long term.
The most you can contribute to an IRA in 2014 is $5,500, but if you are 50 years old or older, you can contribute an additional $1,000, thereby allowing you to save up to a total of $6,500.
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 can be tax-deductible depending on your income level and whether you (or your spouse, if you are married) are covered by a retirement plan at work. You can get a distribution from a Traditional IRA at any time, but if you get a distribution before you are 59-1/2 years old, the amount will be subject to a 10 percent penalty unless you meet an exception. You must begin withdrawing funds once you reach 70-1/2 years old. Distributions from a Traditional IRA are partially or fully taxable depending on whether your contributions were tax-deductible.
In a Roth IRA, contributions are not tax-deductible; however, contributions can be withdrawn tax-free at any time and earnings can be withdrawn tax-free if certain requirements are met (generally 5 years after you have made a contribution to a Roth IRA and after you reach 59 1/2 years old). Unless you meet an exception, getting a distribution of the earnings before you reach 59-1/2 years old will be subject to a 10 percent penalty. A Roth IRA is only available if you meet certain income limits. For 2014, if you’re single and your income is less than $129,000 or if you're married filing jointly and your income is less than $191,000, you can contribute to a Roth IRA.
In addition to establishing an IRA with new funds, you also can rollover money you have in an employer-sponsored retirement plan from a previous job into an IRA. Moving money from a retirement plan to an IRA, if done properly, can allow you to continue deferring taxes but give you more flexibility to manage the funds. This is because in an IRA, you will generally be able to invest the funds in a wider range of investments than most employer-sponsored plans typically offer.
An IRA is a powerful savings tool that remains with you no matter where you work. Regardless of whether you participate in an employer-sponsored retirement plan, contributing to an IRA can be any easy and flexible tool to help you 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.