Which IRA is Right For You?

SchoolsFirst FCU IRAs offer an easy, convenient, and powerful way to save for your retirement—one of the most important things you can do to ensure your future financial well-being. Both Traditional and Roth IRAs are excellent retirement savings tools, but you should consider these questions before you choose one:

  • To tax or not to tax? Contributions to a Traditional IRA are tax-deductible. Contributions to a Roth IRA are not. So if you made $40,000 for the year and contributed $2,500 to your traditional IRA, your taxable income would drop to $37,500. With a Roth IRA, you would still be taxed on $40,000.
  • What happens when you retire? When you retire and begin to withdraw your savings, you will pay no taxes on money taken from a Roth IRA (based on certain guidelines). With a Traditional IRA your contributions and earnings will be taxed.
  • Are there age requirements for distributions? With Traditional IRAs, you must begin to take distributions at age 70 ½. But with a Roth IRA, there is no age distribution requirement as long as you continue to earn taxable income.

Should You Convert Your Traditional IRA to a Roth IRA?

It may be beneficial to convert your Traditional IRA to a Roth IRA; however, you should consider several factors before making the change.

 

  • What is your projected future tax bracket? Do you expect to be in a higher or lower tax bracket when you retire? If you think it will be lower once you start making withdrawals, you may want to keep your Traditional IRA.
  • What are the tax implications? With a rollover, earnings on your Traditional IRA are subject to mandatory federal and applicable state taxes. However, you will not be subject to the mandatory 10% early withdrawal penalty.
  • How much longer do you intend to work? The more years you have until retirement, the more conversion benefits you have, since your money will have more time to accumulate tax-free earnings.

Traditional IRAs vs. Roth IRAs

Traditional IRA Roth IRA
Earnings are tax-deferred, NOT tax-free Tax-free withdrawals of earnings are permitted (under certain guidelines)
Contributions not permitted during the year in which you would attain 70½ No age limit to make contributions as long as you have reportable earned income
Mandatory distributions are required at age 70½ No age limit requirement for required distributions
You are required to withdraw funds from age 70½ on. Heirs must report assets from a Traditional IRA as taxable income. You are not required to withdraw from your account during your lifetime. This allows you to leave more to your heirs, who do not have to report Roth assets as taxable income.

Choosing the right IRA can be complicated, so we suggest that you talk to your tax advisor to see which IRA best suits your needs1.

 

SchoolsFirst FCU’s experienced financial advisors can also help analyze your current portfolio and make recommendations on how best to achieve your retirement savings goals. Arrange a meeting online, schedule to meet an advisor in person at any branch, or call 714/258-4000, Monday through Friday, from 9 a.m. to 5 p.m.

 

1Please consult a qualified tax professional for tax advice on your specific situation.
Representatives are registered, securities are sold, and investment advisory services are offered through CUNA Brokerage Services, Inc. (CBSI), memberFINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (866) 512-6109. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value, and are not obligations of or guaranteed by SchoolsFirst FCU. CBSI is under contract with SchoolsFirst FCU, through the financial services program, to make securities available to Members. CUNA Brokerage Services, Inc. is a registered broker/dealer in all fifty states of the United States of America.

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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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