Three Reasons to Open a Tradition or Roth IRA
No matter your plans for retirement, adding an Individual Retirement Account, or IRA, to your savings plan is a way to help get you there. An IRA allows you to save for retirement with tax benefits including tax deferment and potential tax deductions. If you don’t already have an IRA, here are three reasons why you should consider opening one:
You can save for tomorrow today
Putting money into an IRA can help you save for retirement since the income from interest, dividends and capital gains compounds each year, tax-deferred. You can use an IRA to start your retirement savings or complement your employer-sponsored plan.
IRAs typically offer freedom of choice from a variety of investment options allowing you to build a portfolio of stocks, bonds, mutual funds and other assets. Additionally, with an IRA, you have 16 months to make the annual maximum contribution. You may also be able to withdraw from your IRA for college and medical expenses, if you’re buying your first home or should become disabled.
Anyone can open an IRA, even non-working spouses as long as the household’s taxes are filed jointly. You can even get your kids started on retirement saving early if they are earning income.
The two most common IRAs are Traditional and Roth. Use the chart below to determine which IRA is best for you. When you are ready to get started, Investment Services at UW Credit Union’s financial consultants can help you develop a plan to pursue your retirement goals and choose the IRA that fits your situation. Schedule an appointment by calling 608.232.5000 or 800.533.6773, ext. 2468.
Compare Your Options
When do I pay taxes on my IRA?
- Traditional IRA: Taxes are paid when you withdraw the money in retirement
- Roth IRA: Taxes are paid when you open and make contributions to the account
Does my account grow tax-deferred?
- Traditional & Roth IRAs: Yes.
How much can I contribute?
- Traditional & Roth IRAs: $5,500 for single tax payers and $11,000 for couples filing jointly for 2016. The catch-up limit for people ages 50+ is $6,500.
Are there any income limits to making annual contributions?
- Traditional IRA: No, as long as the account holder has taxable income and is younger than 70.
- Roth IRA: Yes. Single tax payers with Modified Adjusted Gross Incomes (MAGI) of $132,000 o more and married couples filing jointly with MAGI of $194,000 or more are ineligible.
What is the cut-off date for making contributions for the 2016 tax year?
- Traditional & Roth IRAs: April 17, 2017.
When can I withdraw from my IRA?
- Traditional IRA: You must start withdrawing money by the time you reach 70 1/2. If you withdraw before you're 59 1/2, you'll potentially face tax penalties.
- Roth IRA: Withdrawals of contributions are free of taxes and penalties. Withdrawals of earnings are tax and penalty-free if your first Roth contribution was made at least five years prior and you meet one of these conditions: you're 59 1/2, disabled or purchasing your first home. If these requirements are not met, it may result in a 10% IRS penalty tax.
Are my contributions tax-deductible?
- Traditional IRA: Contributions may be tax-deductible but will depend on your MAGI and if you participate in an employer-sponsored plan.
- Roth IRA: Roth IRA contributions are not tax-deductible.