Couple planning their retirement

Photo courtesy of Getty Images.

I want to talk about the future. The future of your finances. While this conversation contains financial terminology that is often dismissed for its intimidating and overwhelming nature, I want to break it down in a way where it’s easily understood. Because I believe that we should be able to have a more hands-on role when it comes to our finances and our future, and that starts with education.

So, you’re wondering if you should move your money into an IRA. First thing’s first, do you know what an IRA is? What it even stands for?

IRA stands for an Individual Retirement Account. It’s an account that can be set up at any number of financial institutions which is is designed to allow you to save up for retirement with tax-free growth or on a tax-deferred basis. There are three types of IRAs, each offering different benefits and advantages depending on your current and future financial circumstances.

  • Traditional IRA is an account in which the money you make contributions with may be deducted on your tax return and any earnings has the potential to grow deferred until you withdraw them while in retirement. The tax-deferral is a key advantage of a Traditional IRA, as retirees often find themselves in a lower tax bracket than they were pre-retirement, so the money will be taxed at a lower rate.
  • Roth IRA is an account of money that you’ve already been taxed on. Depending on your plan and if certain conditions are met, the money could potentially grow tax-free, in addition to the advantage of tax-free withdrawals in retirement.
  • Rollover IRA is essentially a Traditional IRA, but with the intention of “rolling over” money from a qualified retirement plan. Eligible assets from an employer-sponsored plan, such as a 401(k) are moved into an IRA.

Now that we have some basic definitions down, I want you to really consider if you need an IRA. For some, staying under the umbrella of their employer-sponsored plan is the best option, depending on your expenses and investment options. For others, IRAs can offer some pretty great advantages, and I’m not just talking about a wider variety of investment options. Funds will be easier to access, and you won’t have to worry about the 10% early withdrawal penalty for certain distributions.


 

Stay tuned for part two of this blog post, coming soon!