It is never too soon to start thinking about retirement – at least not the financial aspect of retirement. In fact, the sooner you start planning for your “Golden Years,” the more financially secure you will be when the time comes to enjoy those years. One increasingly popular retirement planning tool is an IRA. Before you rush to open an IRA though, you should learn as much as possible about the various types of IRAs and how each one might fit into your overall retirement plan. You should also discuss your options with both your financial planner and your Missouri estate planning attorney before making a final decision.
Retirement Planning in the 21st Century
Planning for retirement has changed considerably over the last 50 years or so. Your parents, or grandparents, likely counted on a company sponsored pension and Social Security retirement benefits to fund their retirement. Unfortunately, the concept of lifetime employment has all but gone by the wayside in the United States and even if you do manage to remain at the same company for your entire working career it is unlikely you will receive the type of pension benefits your parents or grandparents did. Given the unsure future of the Social Security system in the U.S., it is not wise to count on those benefits to fund your retirement either. Moreover, even if Social Security survives, the average Social Security retirement check doesn’t go anywhere near as far as it once did, which is why most people choose to add to their own retirement plan.
What Is an IRA?
An Individual Retirement Account (IRA) is a tax–advantaged retirement account that you own and control. Earnings generated can compound on a tax–deferred basis until withdrawal. In simple terms, an IRA is like a self-funded and directed pension plan. Like a pension, you are able to withdraw funds from your IRA when you retire to help cover your retirement expenses. As IRAs have grown in popularity, several different types of IRAs have evolved. Understanding the difference between the various types of IRAs will help you decide which type is right for you.
- Annual tax deductible contributions are based on income level.
- Withdrawals can begin at age 59½ and are mandatory by age 70½.
- Taxes are paid on earnings when withdrawn from the IRA.
- Anyone with earned income under age 70½ can contribute up to the annual maximum limit.
- Funds withdrawn before age 59½ are subject to a 10 percent penalty unless an exception applies.
- Traditional IRAs may be converted to Roth IRAs by paying income taxes (but no tax penalties) on the IRA distribution before rolling over to a Roth IRA, regardless of income limits.
- Annual contributions are not tax deductible, but eligibility depends on income level.
- Mandatory distributions at age 70½ are not required.
- All earnings and principal are 100% tax free as long as you follow the IRS rules.
- Traditional, SIMPLE and SEP IRAs may all be converted to Roth IRAs by paying income taxes (but no tax penalties) on the IRA distribution before rolling over to a Roth IRA, regardless of income limits.
- Eligibility is determined based on income
- Principal contributions can be withdrawn any time without penalty as long as the required 5-year holding period is met.
SEP IRA – Simplified Employee Plan
- Established by an employer
- Allows the employer to make deductible contributions to a Traditional IRA for participating employees
- Employer decides how much to contribute, up to 25 percent of income (dollar limits also apply)
- Contribution percentages must be the same for all employees
- Employer decides whether to contribute each year; however, if the employer makes a contribution, even to his/her own account, contributions must be made to all accounts.
- Good for small family businesses
SIMPLE IRA – (Savings Incentive Match Plan for Employees)
- Designed for small businesses with 100 employees or less
- Allows employees to make salary-reduced contributions and receive matching contributions from their employer.
- Similar to a SEEP IRA; however, contributions may be made by both the employer and the employee.
- Employer is required to match the employee’s contribution up to three percent.
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about IRAs and/or retirement planning, contact the experienced Missouri Medicaid attorneys at Amen, Gantner & Capriano, Your Estate Matters, LLC by calling (314) 966-8077 to schedule an appointment.