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Could you live comfortably on just $10,740 a year? Chances are the answer is no. But according to the Social Security Administration, $10,740 was the estimated average income for retired workers.
Clearly, social security will not be your only source of retirement income – you must do more on your own to prepare for retirement. Investment vehicles like a Traditional or Roth Individual Retirement Account (IRA) may make sense for you. Both Traditional and Roth IRAs offer substantial tax advantages and, depending on your income and federal tax filing status, you can contribute up to $5,000 a year to IRAs. In addition, if you’ve reached age 50, you can contribute as much as $6,000.
Traditional or Roth?
Even if you are already contributing to your employer’s retirement plan (such as a 401(k) or 403(b)) it may be a good idea to supplement your retirement savings by contributing to an IRA. If you currently have a Traditional IRA, you may benefit from converting it to a ROTH IRA. Following is a snapshot of the benefits of the two types of IRAs:
Tax-free vehicle (Funded with after-tax contributions)
Potentially tax deductible
Withdrawals of earnings are tax-free*
No mandatory distributions at age 70½
AGI is not more than $101,000 (single) or $159,000 (married); phaseouts apply
if AGI is $101,001–$116,000 (single) or $159,001–$169,000 (married)
*Generally, if you take distributions from a retirement account prior to age 59½, you will be subject to an IRS 10% early withdrawal penalty in addition to regular income tax. Before withdrawing any funds from a tax-deferred investment account, you should consult with your tax or investment advisor.
In addition to the Traditional and Roth IRA options available to you, if you or a spouse report self-employment income on a Schedule C you may qualify for a SEP-IRA (which is tax deductible). The maximum contribution for self-employed individuals is the lesser of 25% not to exceed $46,000 based on the first $230,000 of compensation.
The cost of waiting
Aside from the fact that IRAs are convenient, tax appealing and flexible, its most attractive feature – which you control– is its power to accumulate over time. The chart below illustrates how $1,000 invested at the beginning of each year would grow at an assumed 8% annual rate of return.
Invested per year
Total value at age 65
Cost of waiting one year
Cost of waiting five years
As you can see, the earlier you start investing, the better. And while an IRA is by no means the answer to all of your retirement needs, opening one sooner rather than later could very well mean the difference between living a comfortable retirement and enjoying the retirement of your dreams!
Want more information?
Call 800.961.8160 today to determine which type of IRA is best suited to your needs, or simply to obtain guidance on your existing IRA investments.