When saving for retirement, people are can choose from an array of investment vehicles: 401(k)s, 403(b)s, IRAs, savings accounts, brokerage accounts and others. Of these, the IRA is one of the most utilized investment accounts. These are five advantages of Traditional IRAs.
Anyone can open an IRA. Many investment accounts are restricted to a specific demographic. 401(k)s are only available to employees of companies that offer them. 403(b)s are only available to non-profit employees, clergy and public school teachers. This is not true with an IRA. IRAs can be open by everyone.
Tax Deductible Contributions
For most people, the contributions made to an IRA can be deducted from that year’s taxes. This is dependent upon income, and is not true for the extremely wealthy. However, the majority of Americans can deduct their IRA contributions. To avoid wrath from the IRS, everyone should check with a professional tax advisor before taking these deductions.
Taxes are only paid when money is withdrawn from an IRA. This is one of the major reasons to save for retirement in an IRA, instead of a standard brokerage account. The contributions made to it are not taxed when they are made. Growth is not taxed either. For decades, a nest egg can grow tax-free. It is only taxed when withdrawals are made.
NOTE: This is the major difference between Traditional IRAs and Roth IRAs. The above applies to Traditional IRAs only. When investing in a Roth IRA, taxes are paid on the contributions, but not when money is withdrawn. In a Roth IRA, money can grow for years, and tax is not paid on it. Which is more suitable for an individual often depends on one’s age. Consulting a professional investment advisor can help people decided if a Traditional IRA or Roth IRA is more appropriate for their situation.
Withdraw Before 60
The standard retirement age has been 65 in recent years, although it is slowly being moved back. With an IRA, people do not need to wait until 65 to withdraw their earnings. At 59 ½, money can be withdrawn without a penalty. (Withdrawals before that age incur a 10% penalty). For people who want to retire early, IRAs can be very attractive.
IRAs offer the greatest flexibility of all tax-sheltering investment accounts. Unlike 401(k)s, which cannot hold individual stocks, or 403(b)s, which have strict restrictions, IRAs can hold a variety of investments. People can use IRAs to hold individual stocks, bonds, certificates of deposit (CDs) and other common investments. While employer-controlled accounts offer many advantages, they do not have the flexibility of an IRA.
There are few reasons not to have an IRA. Saving for retirement is important, and they are the IRS’s way of encouraging all Americans to save for the future. In an IRA, people’s savings are sheltered from taxes. The specific way is determined by the format of the IRA. With an IRA, people can invest how they want to. Everyone should consider having an IRA.