Saving for Retirement through IRAs - AARP

Saving for Retirement Through IRAs

Millions of working Americans have access to work-based retirement savings plans, such as a 401(k). But you may be one of the more than 70 million workers left out of this coverage. For you, an Individual Retirement Arrangement, or IRA, is a great way to save for retirement.

AARP offers a variety of resources to help you plan for your retirement at aarp. org/readyforretirement. In the meantime, here's what you need to know about IRAs.

IRA Basics Here are some basics on IRAs:

?? An IRA is an account you open at a financial institution. You typically need anywhere from $100 to $1,000 to get the account set up.

?? You can contribute up to $5,500 a year, or $6,500 a year if you are age 50 or over.

?? You can choose among investment options offered by the financial institution. Typically, banks offer certificates of deposit (CDs) or money market funds. Other institutions, like brokerages, life insurance companies and credit unions, offer stocks, bonds, mutual funds and other options.

?? When choosing investments, be sure to consider how fees on your accounts will impact your investment gains.

For example, Index funds, which just purchase a specific group of stocks, generally have much lower fees than professionally managed funds.

?? Your best bet is to set up regular, automatic contributions. You may be able to set up a payroll deduction; otherwise, you can set up an automatic payment from your regular bank account.

Traditional and Roth IRAs You can choose between two types of IRAs -- a Traditional or a Roth. (If you're selfemployed, you can select a SEP-IRA, which we cover in another tip sheet.) The basic difference is in the taxation of your contributions and earnings.

Your contributions to a Traditional IRA are tax deductible. When you withdraw them at retirement, you will pay ordinary income taxes on what you contributed and on your investment earnings. You will likely be in a lower tax bracket by then.

With a Roth IRA, your contributions aren't tax deductible when you make them, but you pay no tax on your withdrawals (including investment earnings) in retirement.

Here's generally how the Traditional and Roth IRAs compare:

Who's eligible

How much you can contribute

How it's taxed

Traditional

Workers under age 70? with earned income and nonworking spouses, up to a limit.

Roth

Workers and nonworking spouses of any age but income limits apply. See IRS Publication 590 at irs. gov for current limits.

$5,500 a year

$6,500 a year if you're 50 or over

Excess Contributions are taxed at a rate of 6 percent.

Contributions are tax deferred; you pay taxes on your contributions and investment gains when you withdraw them in retirement.

If you also participate in a 401(k)-type plan, your contributions may be taxable.

$5,500 a year

$6,500 a year if you're 50 or over

Excess Contributions are taxed at a rate of 6 percent.

Contributions are taxable, but you pay no taxes on investment earnings when you withdraw them in retirement.

Withdrawal rules

Can begin withdrawing after you reach Withdrawals of contributions are

age 59?; before then you'll pay a 10

tax-free. Can begin withdrawing

percent penalty and ordinary income

investment earnings after age 59?

taxes.

as long as you've held the account

Must begin minimum required

at least five years.

withdrawals at age 70??. You will face a No minimum required withdrawals

50 percent penalty for not taking required

minimum distributions each year after

that.

.

Both the Traditional and Roth IRAs offer exceptions to withdrawal rules. For example, you can withdraw money penaltyfree from your Traditional IRA for these reasons:

?? College expenses

?? First-time home purchase (up to $10,000)

?? Certain medical expenses

?? Total and permanent disability

?? If you're a reservist called to active duty

?? You inherit an IRA

?? You are receiving distribution in the form of an annuity

You'll still have to pay ordinary taxes on your withdrawal from a Traditional IRA for these reasons. However, if you own a Roth IRA, you can withdraw money tax-free for any of these purposes at any time.

Rollover IRAs If you have a 401(k)-type plan from a prior job, you have several options on what to do with it. You can leave it with the old employer (unless it's under $5,000), cash it out (a bad idea for retirement money, plus you'll take a tax hit), or roll it into what's called a Rollover IRA. You can open a Rollover IRA in the same way you'd open a new IRA. And, if you get a job where a 401(k) type plan is offered later on, you can

roll your Rollover IRA into the employer plan if you want. Starting in 2015, you will only be allowed to rollover 1 IRA per 12 month period.

All IRAs can be rolled over, but because of the Roth IRAs tax deferred status, there can be implications when filing your taxes. You should talk to a tax professional if you are considering rolling over a Roth account into a 401(K) or Traditional IRA.

option. Open one today through a bank or other financial institution.

QQ Understand the investment options available and decide if they are right for you before opening your account.

QQ Decide which type of IRA would provide you with the most retirement income using a free and easy calculator, like the one at (search "Roth vs. Traditional").

Take Action! QQ Make a plan for your retirement. Be

specific and set realistic goals to help make retirement attainable. Go to readyforretirement for resources to help you plan, budget and save.

QQ If you don't have access to a work-based retirement plan, an IRA is your next best

QQ If you are self-employed, consider a SEPIRA, which offers higher contribution levels. We have a tip sheet on SEP-IRAs at money.

QQ Learn more about IRAs through Publication 590 from the Internal Revenue Service.

?AARP 2014.

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