Benefits of investing with an IRA
An IRA is an investment account designed to help you save money for retirement. It can be used in place of or as a supplement to an employer-sponsored 401(k) plan. IRAs combine the power of compound interest with lucrative federal tax benefits, which can lead to substantial growth over time. The earlier you start to save, the better, since your savings will have more time to grow.
Which type of IRA is right for you?
The two most popular types of IRAs are traditional IRAs and Roth IRAs.
To know which is right for you, ask yourself this question: When it comes to taxes, would you rather pay now or pay later? Generally, if you expect to be in a higher tax bracket when you retire than you are in now, then you'll want to choose a Roth IRA. But if you think your tax bracket will be lower in retirement (more likely the case), then you should choose a traditional IRA. Here's why:
- A traditional IRA offers upfront tax savings since your contributions are tax deductible as are the earnings. That tax break makes it easier to save more money now, which is especially useful if you can't afford to contribute a substantial amount to your IRA in a given year. But you will have to pay taxes on your contributions and any earnings in the account when you withdraw. (Pay later.)
- With a Roth IRA, you make contributions with post-tax dollars, so your contributions are not tax-deductible. The upside: your savings grow tax-free, and in most cases neither the money you put in nor the earnings you accrue will be taxed when you withdraw. (Pay now.)
If you're not sure what your tax bracket will look like in your retirement years, consider contribution limits and withdrawals, which are explained below.
For both 2020 and 2021, the IRS allows up to $6,000 per year (up to $7,000 for those 50 or older) in total contributions to your traditional and Roth IRAs combined.3 However, with a Roth IRA, your annual contribution limit is based on your modified adjusted gross income (AGI).4 If your AGI is:
- Less than $120,000 (less than $196,000 if married filing jointly), you will be eligible to contribute the maximum amount. (These income limits increase to $125,000 and $198,000, respectively, for contributions for the 2021 tax year.)5
- Between $124,000 and $138,999 ($196,000 and $205,999 if married filing jointly), your limit will be reduced. (These income limits increase to $125,000 to $139,999 and $198,000 to $207,999, respectively, for contributions for the 2021 tax year.)
- $139,000 ($206,000 if married filing jointly) or more, then your only option is a traditional IRA. ($140,000 and $208,000, respectively, for contributions for the 2021 tax year.)
Note: You can make IRA contributions for the 2020 tax year until April 15, 2021.
Whether you invest with a traditional IRA or a Roth IRA, if you take an early withdrawal (before age 59), then your nest egg could be subject to taxes and a 10% penalty. For both types of IRAs, there are a few exceptions to the 10% penalty, such as paying for the down payment on your first home or certain medical expenses.6
An important difference between traditional and Roth IRA withdrawals is how long you can wait before you begin withdrawing money.
With traditional IRAs, you used to be required to start taking minimum distributions each year once you turned 70. However, due to changes made by the SECURE Act, if your 70th birthday is July 1, 2019 or later, you aren't required to start withdrawing money from your traditional IRA until you turn 72.7
In contrast, there are no required minimum distributions with a Roth IRA.
- With a traditional IRA, you must start taking required minimum distributions each year once you turn 70, and the amount will vary based on certain parameters, such as your age and account balance.5
- There are no required minimum distributions with a Roth IRA.
How to open an IRA
Once you decide which type of IRA you want, start researching your options. Pay attention to account minimums, account maintenance or setup fees, and transactional costs. Fees and expenses can eat into your retirement savings, so keep an eye out for those when comparing options. Regardless of which type of retirement account you choose, the most important thing is to start saving as early as possible.
If you need help with your decision, a financial advisor can provide additional guidance. Questions? Please give us a call at 1-888-SYNOVUS (1-888-796-6887).