As one of the most powerful retirement savings tools available, an Individual Retirement Account or IRA, is a personal plan that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. IRAs can be combined with 401(k) plans for maximum savings potential.
There are two different types of IRAs. A simple IRA, also known as a traditional IRA is essentially a personal savings plan offering various tax benefits to encourage people to save for retirement. Contribution limits apply and whether contributions are fully or partially tax deductible is impacted by a variety of factors. Investment earnings do grow tax deferred, but distributions are subject to income tax.
The Roth IRA is an alternative to the traditional IRA, providing another form of personal savings plan aimed at prompting retirement savings by offering tax benefits. In the case of a Roth IRA, your allowable contribution may be reduced or even eliminated if your annual income surpasses certain limits.
Both traditional and Roth IRA’s can be tapped to pay for qualified higher education expenses being incurred by you or your spouse, your children or even your grandchildren. However, most financial professionals recommend that you avoid using your IRAs and reducing your retirement nest egg if other assets are available to meet those college expenses. In some circumstances, even a child can contribute to a traditional or Roth IRA themselves.
For more details on these tax-advantaged savings vehicles in which you can hold your retirement investments, see the individual tabs below for each type of IRA. You’ll also find a separate section with helpful information on inherited IRAs.
And remember, it’s never too early to start exploring which of these retirement savings options would be the best IRA strategy for you and your family.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being open for five years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.