IRAs Explained

With pensions becoming less and less common, and Social Security’s future in question, it’s never been more important to think about retirement well in advance. For those whose employers offer 401K plans, they are usually the easiest and most convenient way to save for retirement. But will your 401K yield enough money to see you through your golden years? And what if there is no 401K plan available to you?

Whether you have yet to set up a retirement plan or need to supplement your 401K, an Individual Retirement Account, or IRA, can help. Available from many financial institutions, IRAs are quick and easy to set up. Most require a minimum initial investment, but some firms offer no or low minimums.

The most obvious difference between an IRA and a 401K is that while 401K plans are offered through employers only, IRAs are available to anyone with earned income. But there are several other differences. These include:

* Money contributed to a 401K plan comes from pre-tax earnings. Contributions to an IRA are made from money that is generally subject to taxation. This is offset somewhat by the fact that IRA contributions are tax deductible if certain requirements are met.

* There is a lower limit to the amount that one can contribute to an IRA. In most cases, this limit is $5,000 per year for individuals or $10,000 for married couples.

* An IRA does not offer the benefit of matching funds from your employer like a 401K does. This is the biggest reason why most of those who have access to a 401K plan put as much money as possible into it before considering an IRA.

The most common types of IRAs are the traditional IRA and the Roth IRA. A Roth IRA offers unique tax and distribution benefits, but only taxpayers with an adjusted gross income below the current limit may open one. It is also unavailable to those whose tax filing status is “married filing separately.”

A key advantage of the Roth IRA is that the earnings from the plan are tax-free when withdrawn as long as certain conditions are met. Traditional IRAs offer tax deferment (as do Roth IRAs), but taxes must be paid when the money is withdrawn. A Roth IRA also allows the flexibility of being able to take distributions at any age, whereas traditional IRA distributions must start by the age of 70½.

With today’s changing financial landscape, IRAs have become a more attractive option than ever. They allow us to save more money than we could with a 401K alone, and provide an option for those who do not have access to 401K plans. By taking advantage of an IRA, we can avoid leaving our retirement finances to chance.