Start Your Retirement Planning Now
By Scott Sumerford on Thursday, October 11th, 2007 :: 3:24 pmCategory: Watching Out 4 You
With Social Security’s future uncertain, the onus of a comfortable retirement is on you. If the prospect of being 65 and still having to work another 10 years scares you, then you need to plan accordingly. Establishing an Individual Retirement Account (IRA) today can pay future dividends, literally.
Traditional IRA
Why invest in a traditional IRA? There are several advantages of an IRA over other saving accounts. One benefit is tax-deductible contributions. The government added a tax deduction incentive to IRAs to encourage Americans to save for their future. Another plus is if you plan on being in a lower tax bracket when you retire, which many Americans are, then you will pay fewer taxes since you aren’t taxed until the funds are withdrawn.
Creating an IRA is relatively easy. A traditional IRA can be established with a bank or brokerage firm. Before opening an account, you should check the eligibility requirements and general rules outlined by the IRS. You should also note that you will be penalized if you withdrawal funds before the age of 59 1/2.
Once you’ve opened an account, you need to understand the contribution limits per year. The current contribution limit for 2007 is $4,000 if you are age 49 or younger and $5,000 if you are age 50 or older. However, in 2008 the limits will increase to $5,000 for age 49 or younger and $6,000 for age 50 or older.
Roth IRAs
A Roth IRA differs from a traditional IRA in several ways. The same contribution limits for 2007 and 2008 apply, but the benefits of the account are different. With a Roth IRA, you pay tax on the funds upfront and therefore, they aren’t tax deductible. However, since you paid the tax already, you don’t pay tax when you withdrawal the funds. You also incur no tax liability for transactions inside the account.
Roth IRAs are good for people that assume they will be in a higher tax bracket when they retire. Thus, paying taxes on the funds they are saving now will mean significant savings when they withdrawal their funds. You can also withdrawal your funds without the same penalties of a traditional IRA.
Depending on your financial situation, a traditional IRA may suit your situation better than a Roth IRA or vice versa. Regardless, you need to plan for your retirement now. If you’re struggling with debt to the point you haven’t been saving, then you need to immediately act to eliminate your debt so you can start securing a comfortable retirement.
Author Bio: Scott Sumerford has several years of experience working in the financial industry and has written a myriad of articles on various financial matters. Read more about how Credit Solutions offers a viable alternative to debt consolidation.
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