What is IRA and how does it work?

When planning for retirement, one of the most effective strategies is investing in an Individual Retirement Account (IRA). IRAs offer numerous benefits, including tax advantages, long-term growth potential, and the ability to diversify your savings.

Whether you’re just starting or nearing retirement, an IRA can be a smart addition to your financial plan. In this blog post, we’ll explore why opening an IRA is a good idea and how you can take advantage of the benefits.

Tax Benefits

One of the biggest reasons to open an Individual Retirement Account is the tax advantage it provides. There are two main types of IRAs: Traditional IRAs and Roth IRAs. Each comes with unique benefits.

• Traditional IRA: Contributions to a Traditional IRA may be tax-deductible, reducing your taxable income in the year you contribute. Your investments grow tax-deferred until you withdraw the money in retirement, which means you won’t pay taxes on your gains until you withdraw funds after age 59½. Withdrawals in retirement are taxed as ordinary income, which can be beneficial if you expect to be in a lower tax bracket when you retire. However, if you make any withdrawals before age 59½, you may be subject to a 10% federal tax penalty.
• Roth IRA: With a Roth IRA, contributions are made with after-tax dollars, meaning you don’t get a tax deduction upfront. However, your earnings grow tax-free, and withdrawals in retirement are also tax-free after age 59½ if you’ve had the account for at least five years. This can be a great option for those who anticipate being in a higher tax bracket later in life. If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and a 10% federal tax penalty. The income limits for Roth IRAs may apply – contact us for more information and to see if a Roth IRA is right for you.

IRA Contribution Limits for 2024

Remember, you can make 2024 contributions to your Roth or traditional IRA until April 15, 2025. For the 2024 tax year, the IRS has set the following contribution limits for IRAs:

• Individuals can contribute up to $7,000 per year.
• If you’re aged 50 or older, you can make an additional catch-up contribution of $1,000, bringing your total annual contribution limit to $8,000.
• Visit the GOV website for more information.

These limits make IRAs a powerful tool for building long-term wealth, especially when contributions are made consistently over time.

Need a Tax Break This Year?

Contributing to a traditional IRA is one of only a few tax-smart moves you can make right up until Tax Day. As long as you open and fund your account before the IRS filing deadline, your eligible tax-deferred contributions can be subtracted from your taxable income. And that might be enough to drop you into a lower tax bracket, reducing what you owe at tax time. However, there are some rules to be aware of when it comes to determining if your contributions will be tax deductible based on your income level and if you or your spouse is covered by an employer plan.

Security for Your Retirement

With traditional employer-sponsored retirement plans, such as 401(k)s, you may be limited in how much you can contribute or where your funds are invested. An IRA offers an additional layer of security by giving you more control over your savings. It also acts as a backup if you leave a job and lose access to an employer-sponsored plan.

When Should You Start an IRA?

The sooner you open an IRA, the better. Thanks to the power of compound interest, even small contributions can grow significantly over time. For example, investing $7,000 per year for 30 years, with an average annual return of 7%, could grow to over $700,000. The earlier you start, the more time your money has to grow.

Getting Started

An IRA is a valuable tool for securing your financial future. With tax advantages and contribution limits that allow for steady growth, opening an IRA today can help ensure a comfortable and secure retirement. Don’t wait—start planning now and take control of your financial future!

For more details on IRA options and how to get started, visit Members Trust FCU.