An individual retirement account, also known as an IRA, is a savings account that individuals can open and manage outside of an employer-sponsored retirement account. IRA accounts have tax advantages and allow participants to deposit funds and invest in various stocks, bonds, mutual funds, and other investments to grow a retirement nest egg.
In addition, participants have the option to roll over 401(k) funds from an old employer into an IRA if they find themselves in a career or lifestyle transformation.
If you are in between employers or are starting a new chapter of your career, read on to learn about the benefits of rolling your retirement funds into an IRA account.
The Benefits of Opening an IRA
An IRA can be a great supplemental retirement account no matter where you are at in your retirement savings journey. Some benefits of opening an IRA include:
- It’s Easy to Set Up: Because IRAs are individually owned, virtually anyone can open an account and start depositing funds. IRAs are often a financial destination to rollover a 401(k) from a previous employer. No matter what your need may be, SlavicIRA provides a simple IRA solution to help meet your financial goals. Click here to learn more or to open an account.
- Tax Deductions: Once the account is established, you can continue to deposit and manage funds. All Roth IRA contributions are made with after-tax dollars, meaning that the taxes can be deducted from your income at the time of deposit rather than at distribution. Traditional IRAs allow pre-tax contributions, meaning that the money is taxed upon withdrawal instead of a deposit.
- Tax-Free Growth: Once the money is contributed to an IRA, there are no taxes required for capital gains and dividends until distribution.
- Contributions: According to the IRS, the total contributions you make each year to all of your traditional and Roth IRAs can’t be more than $6,000 ($7,000 if you’re age 50 or older).
Read our blog for more in depth information on the differences between IRAs and 401(k) plans. Now that you know the main benefits of enrolling in an IRA, learn about your options below.
A Traditional IRA allows participants to make pre-tax contributions that may be fully or partially deductible on a tax return, depending on annual income and filing status.
Every year, the Internal Revenue Service (IRS) determines a maximum contribution amount for Traditional IRA plans. While the maximum varies from year to year, participants can utilize a Traditional IRA to roll over funds from a previous employer’s 401(k) plan or to have additional retirement savings in outside of an employer-sponsored 401(k).
Because a Traditional IRA is a retirement account, there are rules and regulations determined by the IRS for withdrawals and required minimum distributions as well. For example, if you withdraw funds from the account before the age of 59½, you will pay a hefty 10% early-withdrawal penalty, along with taxes for the funds unless you qualify for an exception. View the full list of the exceptions from the IRS.
Another option is a Roth IRA. Though it is similar in structure to a Traditional IRA, a Roth IRA provides better tax benefits and tax-free growth for accounts. For example, because funds are taxed before you deposit them into a Roth IRA, anything you deposit and investments you earn money on will not be taxed when you withdraw them in retirement.
In addition, the Roth IRA doesn’t have a required minimum distribution, meaning that participants are not required to withdraw money when they reach a certain age. Learn more about the tax benefits from Investopedia.
Similar to a Traditional IRA, Roth IRAs also has rules and regulations determined by the IRS. If you choose to withdraw funds from a Roth IRA earlier than age of 59½, you will be subject to taxes and penalty fees, unless you qualify for an exception, such as using the funds to purchase your first home or need money for the birth or adoption of a child. You can learn more about exceptions to the penalty and fee structure on Nerdwallet.
Starting a new chapter or changing careers shouldn’t mean your retirement savings needs to come to a halt. Rolling over your 401(k) to an IRA is a great way to continue building your retirement nest egg. To learn more about IRAs or to open an account, visit www.SlavicIRA.com.