IRAs are tax-advantaged retirement savings plans offered by many financial institutions. IRAs have a few key benefits, including tax-free growth and withdrawals in the case of a Roth IRA. If you’re interested in starting an IRA investment or maximizing your current retirement plan, here are some things to consider:
Roth vs. Traditional IRA
There are two main types of IRAs: the Roth IRA and the Traditional IRA. A Roth IRA is a type of retirement account that allows you to save money for retirement with after-tax dollars—meaning that you pay taxes on your contributions and gains each year but don’t have to pay taxes on withdrawals. A traditional IRA functions in the opposite way: You can contribute pre-tax dollars, but any distributions will be subject to income tax in retirement.
You might think this sounds like a wash, but there are some distinct advantages to using one over another. The primary advantage is that Roth IRAs offer tax-free income from withdrawals (for qualified accounts), which means that when you withdraw money from your account during retirement, it won’t be taxed as income.
Also, SoFi experts comment, “With active IRAs, you’ll get access to a broad range of investment options plus no commission.”
Maximizing Retirement Income
One of the biggest advantages of an IRA is that it allows you to save more money for your retirement and other goals. For example, an individual retirement account (IRA) is a tax-advantaged investment account designed specifically for retirement savings. Unlike 401(k) plans or 403(b) plans, IRAs do not require that you participate in an employer-sponsored plan before opening one on your own. In addition, all contributions made into an IRA are considered tax deductible up until specific limits each year.
Tax-Free Earnings
The one significant advantage of an IRA is that you can put your money in an account and not pay taxes on its growth. With a traditional IRA, you won’t owe any taxes until you withdraw funds (provided the money has been held in the account for at least five years). If you withdraw before then, all earnings will be taxed at ordinary income rates.
With a Roth IRA, contributions aren’t tax deductible, but withdrawals are free from federal and state income taxes. This means that you’ll save more than with a traditional IRA over time if your marginal rate is higher now than when you plan to retire or take out funds from your accounts.
Legacy Planning
An IRA is a powerful tool for legacy planning. As you know, an IRA is an investment vehicle that allows you to save money tax-free and reduce your taxable income. Unfortunately, most people don’t realize that the funds in an IRA can be used for more than just retirement. They can also help provide for your loved ones after death.
The beneficiary of an IRA has complete control over how those funds are distributed upon the owner’s passing, making them especially useful in situations involving multiple heirs. For example, suppose one child has no interest in inheriting the estate, and another does. In that case, it can make sense for the former not to receive anything from their parent’s account so that everything goes straight into what would otherwise have gone into their sibling’s hands instead.
Another advantage of an IRA is that you can invest it in various securities and investments. This means that your money will be safe and sound, and you’ll be able to make the most out of it by investing wisely.
