IRAs are tax-advantaged retirement savings plans provided by financial institutions but owned and funded by individuals. The Internal Revenue Service defines IRA as Individual Retirement Arrangement, which covers a broad category of retirement savings vehicles. However, to most Americans, IRA means individual retirement account.
Two common types of individual retirement accounts1 are:
Traditional IRA — You can contribute to a traditional IRA if you (or your spouse if filing jointly) have taxable compensation but not after you are age 70½. Contributions are eligible for a credit when the individual files a federal income tax return. Withdrawals are taxed as ordinary income.
Roth IRA — You can contribute to a Roth IRA at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts. Contributions are not eligible for a tax credit but withdrawals may be taken tax-free (subject to certain conditions and restrictions).
The most you can contribute to all of your traditional and Roth IRAs is the lesser of:
- $6,000, or $7,000 if you’re age 50 or older by the end of the year
- Your taxable compensation for the year
Common uses of an IRA
Your employer’s deferred compensation plan was created to allow employees to put aside money from each paycheck toward retirement. The plan uses groups participants’ buying power to offer a wealth of benefits and services that employees might not be able get outside the plan.
There are times when IRAs may be desired. For example, if you have maxed out what you can contribute annually to your deferred compensation retirement account, an IRA may provide another retirement savings vehicle for you.
Upon retirement, some individuals may opt to move assets into an IRA to assume more control and choice in investment options.
Workers who change jobs but are not immediately eligible to enroll in their new workplace retirement plan may roll their money into an IRA until they can roll it into their retirement plan.
An IRA can provide gig workers – individuals who change jobs frequently – a stable vehicle to save for retirement.
What to look at when evaluating an IRA
Fees – IRAs are generally a retail product for the financial institutions that offer them. Therefore, you may find that there are charges or fees for services that you receive at no extra charge or at group pricing through your employer’s retirement plan. In addition, there could be advisor or other fees added in for special services. Those fees are being withdrawn from your assets on an ongoing basis. Before deciding to roll assets into an IRA, you should understand what its fees are and how much money that equates to.
Asset allocation options – Investment options vary widely. You should consider what funds are available through the IRA as well as their performance, share classes and expenses. Though they may have the same name, funds available through IRAs may feature share classes that differ from those available through your employer’s retirement plan. Those differences may affect the ongoing fees assessed against the fund’s performance.
Distribution features – What options exist for withdrawing your money when and how you need it? Do any of these options meet the needs you may have for retirement income? What if you have an unexpected need for money, or a sudden health change? Consider how the IRA will work with your Social Security and pension benefits, and other income streams.
Service and support – What comes at no extra charge with your deferred compensation retirement plan may not be as readily available or available without a fee.
Online tools and support – What kind of resources are available? How easy will it be to manage your account? Does it offer interactive tools to help you achieve retirement readiness?
Account security – How well would your personal privacy and account data be protected from unauthorized access?
Taxes – There may be tax implications to your decisions. Before you make any decision, consider talking to your tax advisor.
Purpose of the plan – Your employer’s deferred compensation plan exists for the exclusive benefit of participants and their beneficiaries. Will the IRA provider treat you and your assets the same way?
|While an IRA may be appropriate for a family member or friend, it may not necessarily be right for you and your needs. Be sure you understand all your options fully before you make decisions about retirement savings plans. Consider talking to us first.|
1 There are other several types of IRA that exist to serve needs that are outside the purpose of this page. Qualified retirement plans, deferred compensation plans and individual retirement accounts are all different, including fees and when you can access funds. Assets rolled over from your account(s) may be subject to surrender charges, other fees and/or a 10% tax penalty if withdrawn before age 59½. Investing involves market risk, including possible loss of principal. No investment strategy or program – including asset allocation and diversification – can guarantee a profit or avoid loss. Actual results will vary depending on your investment and market experience. Nationwide representatives cannot offer investment, legal or tax advice. Contact your own advisor for these services.