How to Pick the IRA That’s Right for You

How to Pick the IRA Thats Right for You Header ImageAre you a masterful retirement savings maximizer? Or maybe just getting started with retirement planning?

No matter what your retirement savings experience, you might benefit from an IRA. These retirement savings vehicles are highly flexible and can give you greater latitude to plan for the future.

But choosing one can be tough – there are many options out there, and finding the one that works best for you can take some research. In this basic guide, we’ll cover some special situations that might make one IRA stand out more than the others.

This basic guide will help you get started in finding the IRA that suits your needs and your lifestyle. As always, before making any decisions, please consult your financial advisor or conduct some due diligence on your choice.

Are you… earning less than $133,000 this year ($196,000 if married)?

For filers who meet the income requirements, a Roth IRA can be a powerful savings tool. With a Roth IRA, you contribute after-tax dollars to the account, meaning you won’t get a tax deduction for the money you set aside. However, in retirement, you’ll be able to take tax-free withdrawals from the account to supplement your income.

In other words, any growth in your Roth IRA is completely tax-free.

Roth IRAs allow a contribution of $5,500 ($6,500 for those over age 50) for those earning less than $118,000 per year, or $196,000 for married couples. Above this income level, your contribution limit shrinks. Eligibility for the Roth IRA is phased out at earnings above $133,000 for single filers and $196,000 for married couples.

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When is a Roth IRA a good idea?

Generally speaking, the tax-free withdrawal feature of Roth IRAs is most beneficial to people who expect to have higher income needs in retirement. If you expect your income to rise over time, you could benefit by paying taxes on your contributions today rather than paying higher taxes on your withdrawals tomorrow.

To start learning more about Roth IRAs and whether one might be right for you, please read this introduction to Roth IRAs, one of many informative articles you can find in the our Investor Education Center.

Are you… already maxing out your 401(k)?

If you’re already making maximum contributions to a 401(k), you are probably either a great saver or a higher earner (or both!). But what if you want to save even more?

For savers who qualify for a Roth IRA and who would prefer its delayed tax benefits, a Roth IRA might be a route to consider. This will help you keep the tax benefits and boost your savings. On the other hand, if your income is above the limits, you could consider contributing to a Traditional IRA.

Generally, Traditional IRA accounts offer tax-free contributions, meaning that you won’t be taxed on income that you divert to your Traditional IRA. When you start using the money in retirement, you’ll pay income tax on any money you withdraw from the account.

However, your eligibility for the deduction depends on your income and whether you’re already contributing to your workplace plan. For those maxing out their contributions to a 401(k), the tax benefits of a Traditional IRA are likely to be reduced.

Traditional IRAs have the same savings contribution limits as Roth IRAs – you can contribute up to $5,500 for 2017, or up to $6,500 if you’re over age 50. There are no income limits on contributing to a Traditional IRA, though, again, the tax benefits of contributing are phased out as your income rises.

When do Traditional IRAs make sense?

Even if you don’t qualify for a deduction, Traditional IRAs can still be useful. You might still benefit personally if you want to ensure your savings are safely separated from the rest of your assets (a great tool in the face of challenges to one’s willpower!), of if you want to do some strategic planning ahead of your child’s college financial aid applications.

More generally, for those eligible for the immediate tax benefit, Traditional IRAs make sense when you expect your income needs to fall in retirement. For example, if you’re planning on having your mortgage paid, kids out of the house, and a slightly more modest lifestyle, you may have a lower income requirement than you do today.

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Are you… self-employed, or with a business on the side?

If you’re self-employed, it’s imperative that you take retirement planning into your own hands.

Two IRA options you might want to consider are the SEP IRA and SIMPLE IRA. These accounts were designed with entrepreneurs in mind: they’re simple to set up (no pun intended), cost-effective, and don’t require any special tax reporting efforts.

When does the SEP IRA or SIMPLE IRA make sense?

On the most basic level, a SEP IRA might make sense if you:

  • Don’t have any employees (or if you want to offer them a very generous plan).
  • Are setting up the IRA for a side business, meaning you’re already covered by a 401(k) or another plan at work.
  • Want to maximize your contribution limit (for 2017, you can contribute up to the lesser of $54,000 or 25% of each employee’s compensation – there are some additional calculations for self-employed account holders).

A SIMPLE IRA might make more sense if you:

  • Have employees or plan to grow your business.
  • Want to offer your employees a retirement savings plan as a company benefit.
  • Want to limit your business’ contribution liability to a matching contribution. As the business owner, you can choose a matching contribution of 1-3% of your employees’ savings. The employee contribution limit is $12,500 for 2017, or $15,500 for those over age 50.

Are you… a stay-at-home spouse?

If you’re married and one spouse is out of the workforce, consider taking a look at the Spousal IRA. This is an often-overlooked way to ensure continued retirement savings for those who aren’t working.

Spousal IRA accounts allow the working spouse to make contributions on behalf of the non-working spouse – into either a Roth or Traditional IRA. The account belongs to the non-working spouse, but allows the couple to boost their retirement savings and take advantage of the possible tax benefits involved.

In order to qualify for a Spousal IRA, you must be married and file a joint tax return. The contribution limits are the same as for Traditional and Roth IRAs, and the same rules governing tax deductibility apply. In other words, your eligibility for the Roth IRA and the potential tax benefits of the Traditional IRA will depend on your family’s income.

Make sure to do your homework!

Choosing an IRA can get complicated very quickly – there are so many options out there and people’s lives vary just as widely. The best IRA for you might not be the best one for your neighbor!

Before choosing an IRA, do your homework to make sure it’s a suitable fit for your needs. Speak to your financial advisor, confer with your accountant, or do your research on reputable websites.

Part of this process is ensuring that you understand the rules governing each type of IRA account. Those rules can include:

  • Tax treatment of contributions and withdrawals
  • Early withdrawal restrictions and penalties
  • Exceptions to early withdrawal rules
  • Required minimum distributions in retirement
  • Employer vs. employee contribution rules, limits, and tax treatments

Taking the time to make a suitable choice is worth it: not only will you be building momentum in your retirement savings, you’ll be able to get the most tax benefit out of these amazing savings vehicles.

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Let Us Help!

We can discuss this topic and more at a complimentary appointment. As a bay area retirement planning coaches, we can give you a review and make suggestions based on your retirement objectives.

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The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.

Securities and advisory services offered through United Planners Financial Services, member FINRA, SIPC. Pasquale Vitucci, CA Insurance Lic. # 0758212, is an Endorsed Agent of Vitucci & Associates Insurance Services CA Insurance Lic. # 0I06319. Vitucci & Associates Insurance Services and United Planners are separate and unrelated companies.

Further Reading

Roth IRA income restrictions: https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2017
Traditional and Roth IRA basics: https://www.irs.gov/retirement-plans/traditional-and-roth-iras
Traditional IRA deduction limits for working filers: https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
College financial aid: https://www.fastweb.com/financial-aid/articles/how-do-retirement-funds-affect-student-aid-eligibility
SEP Plans: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
SIMPLE Plans: https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-contributions
Spousal IRA: https://www.irs.gov/publications/p590a/ch01.html#en_US_2016_publink1000230444

This page contains links to third-party company websites. By selecting a link, you will be leaving our website and launching a new browser window. These links are provided for informational purposes only and should not be viewed as an endorsement, sponsorship, solicitation or other affiliation with respect to any third parties. We are not making any recommendations or providing any advice on securities in particular or investments in general. Neither Vitucci & Associates nor United Planners Financial Services have reviewed the content of, and are not responsible for, the information or the results of the third-party websites.

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