Ever asked yourself “Do I need an IRA?” Before we dive into that discussion, let’s be clear on what an IRA is.
An Individual Retirement Account is a financial vehicle that provides a tax shelter for your retirement dollars. If you are under the age of 50, you can contribute a maximum of $5500 per year into an IRA. By making that contribution, you get a current year tax deduction. For example, if you make $45,000 and contribute $3000, then your taxable income in that year will be $42,000. The $3000 you contributed goes into the IRA and is invested in the market based on your investment choices and is subject to gains and losses over time.
You can access the funds after age 59 ½. Once you begin withdrawing money, you are taxed on that amount as ordinary income. An IRA provides a current year tax deduction and tax deferred growth over time.
That leads us back to our question — should you have one? As usual, in response to most financial questions, the answer is – IT DEPENDS. Here’s what you need to ask yourself
Do I need access to the money before 59 ½?
If the answer is likely yes, you will be subject to a 10% penalty and taxation – if you intend to use the money before “retirement age” then it may not be worth the penalty.
Do I have a 401k or other retirement vehicle already?
If you do, you may want to look at what those options are first. If your 401k offers a company match — that’s hard to overlook. Your IRA would be based only on your contributions, whereas a 401k company match might help double your contributions.
How much do I make?
Many people don’t realize that not everyone CAN use an IRA. If you make over a certain amount of money and have a retirement plan or your spouse does, there are limits regarding when you can make a deductible contribution. Talk with your tax professional about your particular situation. The IRS website also has current information about limitations.
What if I don’t have any other retirement plan?
An IRA might be a good option if you’re not saving anything for retirement. The dollars you save today help build security for the long term. Don’t let the absence of traditional company benefits or a retirement plan prevent you from future financial security.