Why make 2015 the year of the IRA: 4 reasons to use an IRA
June 29, 2015
Lee Frush knows that it's not always easy to think about retirement: You still have kids to send to college, mortgage payments to make and credit card debt to trim.
But Frush, a certified financial planner with Atlanta's Cornerstone Financial Management, also knows how important it is to start saving for retirement as early as possible. The sooner you begin saving, the faster you'll build up a nest egg that allows you to live your retirement years in comfort.
And one of the best ways to save that money? By investing it in an Individual Retirement Account, better known as an IRA.
"People do often have a problem seeing the long-term picture," Frush says. "It's much easier to spend that money today than it is to save it. When you're talking to 25-year-olds about opening an IRA, they can't project their lives out to 65. But then it is 40 years down the road and they haven't saved nearly enough."
Why 2015 is the year of the IRA
Frush and other certified financial planners say that this should be your year of the IRA. There's no excuse not to start socking away some money in a retirement account, even if you are already contributing dollars to your company-provided 401(k) plan. The federal government lets you to contribute to both an IRA and a 401(k) plan. If you can afford to do both, that's ideal.
And if you don't have a 401(k) plan? Then you definitely need to invest in an IRA this year. The IRS says that you can contribute a total of $5,500 to an IRA in 2015, or $6,500 if you're 50 or older.
"The most difficult decision all of us face during our earning years is how much do we live in the present and how much do we prepare for the future?" says Bruce Vandegrift, a wealth adviser at Rockford Bank and Trust Company in Rockford, Illinois. "Investing in an IRA is one of the best ways to prepare for our future."
Here are four reasons why investing in an IRA today makes sense for your financial future:
1. There's a right IRA for you
You have your choice of two main IRA types: the traditional IRA and Roth IRA. The main difference between the two? It's mostly about when you take your tax hit.
With a traditional IRA, you'll pay taxes after you begin withdrawing money. With a Roth IRA, you won't pay any taxes when you withdraw money from your account. You will, though, pay taxes on your money when you first deposit it into your account.
There are other differences. You can keep your dollars in a Roth IRA for as long as you'd like. With a traditional IRA, you must begin making yearly withdrawals from your account once you reach 70-and-a-half.
One thing isn't different, though: If you withdraw funds from an IRA -- traditional or Roth -- before you reach age 59-and-a-half, you'll face a 10 percent penalty from the federal government, in addition to any taxes you'll have to pay. So avoid doing that.
The best way to determine whether a Roth or traditional IRA is best for you is to decide whether a tax deduction today is more important than being able to withdraw money tax-free in retirement. A traditional IRA gives you an immediate tax deduction, though it's not a direct dollar-for-dollar write-off. A Roth IRA does not. But when you retire, you will have to pay taxes on the money you withdraw from a traditional IRA. That won't happen with a Roth.
2. You can reduce your taxable income
No one likes paying income taxes. A traditional IRA, at least, can help lower the amount you have to pay.
When you contribute to a traditional IRA, you reduce your taxable income by whatever amount you deposit in your account that year. If you deposit $4,000 in your traditional IRA this year, your taxable income will drop by $4,000.
Tommy Lee, a partner with the Atlanta office of Habif, Arogeti & Wynne, LLP, a tax, audit and business advisory firm, says that this benefit is too good to pass up.
"I consider an IRA the most efficient way to save for retirement," Lee says. "We encourage our clients to put as much money as they can in their IRAs, whether traditional or Roth. And if you can reduce your taxable income while doing this, why would you pass up that opportunity?"
3. You'll get a big tax break
Lee points out another huge benefit of investing in an IRA: Your money will grow on a tax-deferred basis. You won't pay any taxes on the capital gains you earn on your investments in an IRA until you begin withdrawing that money, sometime after you turn 59-and-a-half.
"I hammer the message home to my own staff: You need to maximize your contributions," Lee says. "The deferral you get from an IRA account is huge. One of the biggest tax breaks you can get is a deferral on the money you earn in a 401(k) plan or an IRA. That is much more valuable than any other itemized deduction you might read about in the paper."
4. You'll be crafting a happier retirement
Company pensions have all but disappeared, meaning that it's being left up to individuals to save for their retirement on their own. People are living longer, too. You might live 25, 30 years or longer after you leave the working world.
To secure your retirement savings in the meanwhile, consider putting your money toward options like an IRA money market account.
By contributing to a retirement account, you'll be providing yourself with one more financial cushion for those retirement years. And if you can do this while contributing to your company's 401(k) plan? You'll be steadily building a nest egg that can help make your retirement years happier ones.
"Make sure that you at least contribute enough to your company's 401(k) plan that you qualify for the matching contribution from your employer," Vandegrift says. "That's free money. And if you can then also contribute to an IRA? You should do it. The more money you can save now, the better off you'll be in retirement. Retirement isn't as far away as you might think."