Are you worried about not having enough money for retirement? If so, you're not alone. According to a recent survey from Gallup, 63 percent of Americans are worried about not having enough money saved to fund their retirement. The good news is that if you start saving now, you may be able to close the gap and have enough money accumulated to fund the type of retirement you desire.
One saving option is an Individual Retirement Account, also known as an IRA. You contribute money to an IRA and then invest in a wide range of stocks, mutual funds, ETFs, and more to create a portfolio that aligns with your goals and risk tolerance. The money grows tax-deferred, which means you don't pay taxes on your earnings as long as the money stays in the IRA. You can then withdraw money in retirement to pay for your living expenses.
There are several types of IRAs, but the two most popular are the traditional IRA and the Roth IRA. Here are a few of the differences to help you determine which is best for you:
Traditional IRAs and Roth IRAs are taxed very differently. With a traditional IRA, you get a tax deduction when you put money in the account. The money then grows tax-deferred while in the account. When you take withdrawals in retirement, all the withdrawals are taxed as income.
A Roth IRA is taxed differently. You don't get any tax deductions or other benefits when you put money in the account. However, when you take withdrawals in retirement, all of the withdrawals are tax-free. An easy way to think of it is that with a traditional IRA, you get tax benefits today. With a Roth IRA, you get them in retirement.
Much like withdrawals in retirement, there are different tax treatments for your beneficiaries when you pass away. Both traditional IRAs and Roth IRAs allow you to name beneficiaries to receive your remaining balance when you pass away. With a traditional IRA, the entire death benefit is taxed as income to your beneficiaries. With a Roth IRA, your beneficiaries can receive the death benefit tax-free.
IRAs are meant to be savings vehicles for retirement. In fact, if you withdraw money before age 59 and a half, you could face a 10 percent penalty on the withdrawal. In a traditional IRA, that means you could pay the 10 percent penalty plus income taxes on all early withdrawals. However, in a Roth IRA, you can always withdraw any money you have contributed without paying taxes or a penalty. If you withdraw your earnings you may have to pay taxes and penalties, but that is not the case with your contributions. That could make a Roth IRA a better option if you may need the money for an emergency.
A retirement planning advisor can help you determine which account is right for you. Contact an advisor in your area to start saving for your retirement.