Ask the Advisor: Should I Contribute to an IRA?


Sander Tom is a Financial Advisor and Certified Financial Planner™ with more than 30 years of experience in the financial services industry; more than 15 of those with SchoolsFirst FCU. Over this time, he has developed a deep understanding of investing and its powerful impact on a person’s life. 

Should I consider an IRA?

An Individual Retirement Account — or IRA — allows anyone with earned income to save for retirement. That’s why it’s a great option to start saving for your future, especially if you don’t have an employer-sponsored retirement plan through your job. Also, if you’re self-employed, you can use an IRA to create a retirement plan. In addition, there are special rules that may allow a stay-at-home spouse to contribute to an IRA.

But what are IRAs exactly?

There are two kinds. The first is a Traditional IRA, which is often touted come tax time, because it has the potential to reduce what you owe on your taxes. The beauty of an IRA is it acts like a savings account with tax breaks, because your contributions are not taxed, and your money is able to grow tax deferred until you start withdrawing it come retirement time. And although many people get mixed up about this, an IRA isn’t an investment itself. Think of it as a container where you can put all kinds of investments — such as mutual funds, stocks, bonds, etc. — so you get to decide what to invest in. However, because your contributions are earmarked for retirement, you’ll incur early withdrawal penalties in addition to taxes if you withdraw funds before age 59 ½.

The second kind of IRA — a Roth — uses after-tax contributions, allowing your contributions to grow tax free. Your withdrawals can be tax free too, if you follow the rules. While a Roth won’t help to reduce your taxable income at tax time since you are using after-tax dollars, you’ll still get the benefit of socking away retirement savings tax free and have more flexibility to withdraw your contributions at any time, without penalties. However, earnings you make on your investment can only be withdrawn when you are age 59 ½ or older and have had your Roth for five years or longer, otherwise, you will incur taxes and penalties.

How much can I contribute to an IRA?

According to the IRS, you can contribute $6,000 a year if you’re under age 50, and if you’re 50 or older — $7,000. And if you’re considering an IRA for the 2018 tax year, you have until April 15, 2019 to open and contribute to either a Traditional or Roth IRA.  The amounts above are maximum annual limits for combined total contributions to both Traditional and Roth IRAs. Also, you are no longer allowed to contribute to a Traditional IRA after the age of 70 ½.

This article is for information purposes only. Please consult a qualified tax professional for tax advice on your specific situation.

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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or BALANCE counselor who can help tailor a solution for you.

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