IRA’s are a total vibe…
STORYTIME:
I worked with dozens of financial advisors throughout my career. They were regular partners of mine and whenever I could I would pick their brain… because why not, if you are offered free financial advice by a skilled professional…take it!!
I will never forget my early years in banking, I was young and naieve. Retirement seemed like such a far off concept that I didn’t take much time to learn about them… that was until I met Brent. Brent was a fabulous financial advisor. People trusted him, and he knew how to communicate complex topics in normal language.
I was talking to Brent once about IRA’s and not knowing what to invest in. He gave me the following piece of advice that has served me and my clients well over the years.
“If your job offers a 401K or 403B max it out, up to the amount your company matches, or the max, whichever is less. Additional savings should be used to max out a Roth IRA if you qualify. As long as you qualify continue this method and only turn to a traditional IRA if you no longer qualify for a Roth.”
In retirement, make draws from your 401K as needed until you reach a tax bracket that is most beneficial. Then simply turn off that income stream, and turn on the Roth IRA for tax free money. Having both a taxable and tax free income stream allows a lot more flexibility and the ability to plan for taxes according to your goals.
The other great advice I received from another FA… is that you can’t plan for anything… so there is that perspective as well. This may seem like an odd thing for a financial advisor to say, but what he meant is that anything can happen at any time in this life. We should aim to be flexible and change course when need be. This is true for your life, and your investment strategy.
Here you will find the most common questions and answers people have about IRA’s. I hope you take this as your sign to open an IRA and start contributing to it yesterday… in the VMM toolkit you will find a great resource of a plan that will allow you to contribute pennies at a time in ways that are automated and easy.
What do I need to retire?
No matter how much you think you are saving for retirement, it isn’t enough. I don’t say this to scare you, but to help you understand that you have many options when saving for retirement. This also means that the traditional save method is only one way to retire… the other is through passive income and expense management… but that is a whole other post.
While you should absolutely be maxing out your companies 401K or 403B plan, many people with a high money vibe choose to invest outside of their company plan. Individual retirement accounts (IRAs) are a popular way to save for retirement. Keep in mind IRA refers to the section in the tax code and is not a specific type of account, within an IRA you can own stocks, bonds, cash, mutual funds and other assets… but more on that later. For now know that there are two main types of IRAs: Traditional and Roth. While both offer tax advantages, there are key differences between them.
Traditional IRA
A traditional IRA is funded with pre-tax dollars, which means that contributions are tax-deductible in the year they are made. This can provide an immediate tax benefit, as contributions reduce your taxable income. However, when you withdraw money from a traditional IRA in retirement, you will owe taxes on the withdrawals at your regular income tax rate. In addition, you must begin taking required minimum distributions (RMDs) from a traditional IRA by age 72.
For tax year 2021, the contribution limit for a traditional IRA is $6,000, or $7,000 if you are age 50 or older.
Roth IRA
A Roth IRA is funded with after-tax dollars, which means that contributions are not tax-deductible in the year they are made. However, when you withdraw money from a Roth IRA in retirement, qualified withdrawals (those made after age 59 ½ and held for at least five years) are tax-free. In addition, there are no RMDs for a Roth IRA.
For tax year 2021, the contribution limit for a Roth IRA is $6,000, or $7,000 if you are age 50 or older. However, Roth IRA contributions are subject to income limits. For single filers, the contribution limit begins to phase out at a modified adjusted gross income (MAGI) of $125,000 and is completely phased out at $140,000. For married filers, the contribution limit begins to phase out at a MAGI of $198,000 and is completely phased out at $208,000.
Investing
Both traditional and Roth IRAs allow you to invest in a variety of assets, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). You can also choose from different types of investment accounts, such as a brokerage account or a mutual fund account.
In summary, the main differences between a traditional and a Roth IRA are the tax treatment of contributions and withdrawals, the presence of RMDs, and the income limits for contributions. When deciding which type of IRA to choose, consider your current tax situation, your expected tax situation in retirement, and your investment goals.
Always talk to a tax and financial professional when making any major financial decision.
