Everyone wants to take advantage of tax breaks when they're available. One smart way to do this is with an IRA: it gives those saving for retirement some potentially significant tax savings.
You can go with a traditional IRA for immediate tax deductibility or a Roth IRA that provides for tax-free, long-term growth. Either choice of an IRA in your retirement planning can leave you with more funds for the future. Motley Fool’s recent article, “Why the Smartest Retirement Savers Have an IRA,” describes several advantages that IRAs have over other tax-favored accounts that make them a “must-have” for retirement planning.
- IRAs have flexibility. Many folks say the biggest negative about their 401(k) plan at work is that they are poor investment options. The plans don't offer a variety of investment choices and have high fees. This takes away the savings power of a retirement plan and costs tens of thousands of dollars in lost expenses over the course of a career. However, an IRA allows you to invest in just about anything you want including individual stocks and bonds, mutual funds, or gold bullion. You can also select the lowest-cost options to implement your investing strategy, saving a lot of money that would otherwise have gone to financial providers.
- No employer OK needed. Whatever you make or what other options you have for retirement savings, you can always start an IRA. You only have to earn enough income to cover whatever you contribute, up to the maximum contribution allowed. Note that those over age 70½ are not eligible to contribute to a traditional IRA, and Roth IRA contributions are subject to income limits. There are also other income limits that impact your ability to deduct contributions to traditional IRAs. But if you don't have access to a retirement plan at work, an IRA can be a great option for a tax-favored way to retire.
- IRAs can live on after you pass away. An IRA isn’t only for retirement—it can also help with estate planning. Your heirs will have the option of stretching out the required minimum distributions (RMDs) throughout their lifetimes. This can extend the tax benefits of the IRA for another generation and avoid the tax liability for decades longer than would otherwise be possible.
- Manage your taxes with an IRA. A major advantage of an IRA comes after you retire, when you can manage the tax implications of IRA withdrawals to lessen your tax bill over time. Therefore, if you have a combination of traditional and Roth IRAs, you have the ability to tailor your withdrawals to give you the desired amount of taxable income. Traditional IRA withdrawals are included in your taxable income. However, most Roth IRA withdrawals aren’t. This can give you the flexibility to match up your finances with your tax bill.
Savvy investors use IRAs to plan their retirement better as well as to plan a better retirement.
Reference: Motley Fool (March 5, 2017) “Why the Smartest Retirement Savers Have an IRA”