IRA Options: Retiring the Right Way

There are many different IRAs available to help you save for retirement.

There are many different IRAs available to help you save for retirement.

It is a well-known fact that saving for retirement is crucial. It allows you to live the life want after you are done working, doing things you’ve never had time to do or going places you’ve always wanted to see. But what’s the best way to save for retirement?

That’s a bit of a trick question, as it differs based on you who are, your income level, job and when you plan to retire. Knowing these factors will help you decide which type of retirement account is best for you. Let’s take a look at a few of the most common types of retirement accounts.

Traditional IRAs

  • Overview: Traditional IRAs are tax-deferred retirement accounts, meaning you pay only pay taxes on withdrawals you make in retirement.
  • Contributions: You or your spouse can make contributions if you earn taxable income and are under age 70 ½ .
  • Contribution limits: For 2015, contribution limits are as follows:
    • Under age 50: $5,500
    • Age 50 or older: $6,500
  • Withdrawal Rules: Can be made any time, but withdrawals made if you are under age 59 ½ will be charged a 10 percent penalty in addition to the tax you will have to pay. You can start making withdrawals at age 59 ½ and older without incurring a penalty.
  • Mandatory Withdrawals: You must begin “required minimum distributions” starting the year you turn 70 ½. These distribution amounts depend on how much you have saved and your life expectancy. 

Roth IRAs

  • Overview:  Roth IRAs allow your money to grow tax-free. It is funded with after-tax dollars, meaning your withdrawals in retirement are not taxed.
  • Contributions: Contributions are limited by income level. Generally speaking you can make contributions to a Roth IRA if you have taxable income and your modified adjusted gross income is either:
    • less than $167,000 if you are married filing jointly
    • less than $105,000 if you are single, head of household, or married filing separately (if you did not live with your spouse at any time during the previous year)
    • less than $10,000 if you’re married filing separately and you lived with your spouse at any time during the previous year.
  • Contribution limits: For 2015, contribution limits are as follows:
    • Under age 50: $5,500
    • Age 50 or older: $6,500
  • Withdrawal Rules: You can withdraw money from a Roth IRA at any time, however you may be penalized if it is not for a qualifying reason.
  • Mandatory Withdrawals: There are no mandatory withdrawals for Roth IRAs. They can continue to grow for as long as you like, and can even be passed down in a will.

SEP IRAs

  • Overview:  SEP IRAs, or Simplified Employee Pensions, are for self-employed individuals or small business owners.
  • Contributions: Contributions are made by the employer to themselves and eligible employees (has worked for the company for three of the last five years and has been compensated at least $550). Contributions do not have to be made annually, but when they are made they must be made for all employees. Only the self-employed person or employer can make contributions. Contributions are also tax-deductible for the business or individual.
  • Contribution limits: Contributions cannot exceed the lesser of 25 percent of an employee’s compensation or $53,000 for 2015.
  • Withdrawal Rules: As a SEP IRA is funded through a traditional IRA, withdrawal rules are the same for SEP IRAs as they are for traditional IRAs.
  • Mandatory Withdrawals: Mandatory withdrawals are the same as they are for traditional IRAs. 

SIMPLE IRAs

  • Overview:  Very similar to SEP IRAs, SIMPLE IRAs, or Savings Incentive Match Plan for Employees, are a tax-deferred retirement account for small businesses and self-employed individuals.
  • Contributions: In addition to an employer making contributions like in a SEP IRA, employees can also make contributions in a SIMPLE IRA. Employers are required to make a contribution on the employee’s behalf – either dollar for dollar of up to 3 percent of salary or a flat 2 percent pay – whether the employee contributes or not.
  • Contribution limits: Contributions cannot exceed $12,500 in 2015.
  • Withdrawal Rules and Mandatory Withdrawals: Withdrawals from a SIMPLE IRA are very similar to traditional IRAs with a few notable exceptions that can be found here.

Other retirement options, such as employer 401(k)s and more are also available. The important thing is that you start saving for retirement sooner rather than later. Putnam Bank can help, as we offer a variety of retirement accounts and other investment services. Give us a call or stop by today to start planning and saving for your future.

Putnam Bank, Equal Housing Lender and Member FDIC