Retirement savings. Probably not many people’s favorite subject and yet pretty important to your future. After all, you do want to retire some day, right? As you’ll learn, it’s fairly easy to open a Dane County Credit Union IRA and start saving for retirement.
An IRA (individual retirement account) is either tax-free or tax-differed, depending on which kind you choose. Most often you’ll narrow it down to a traditional IRA or Roth. If you’ll be in a higher tax bracket upon retirement, you’re probably looking at a Roth. If you’re in a higher tax bracket now, most likely it will be a traditional IRA.
In a traditional IRA, the earnings from your contributions are tax-deferred which means you don’t pay taxes now. You will pay taxes on the savings and what they earn when you start withdrawing at retirement. Since your contributions are pre-tax, you may be eligible to deduct now what you contribute/save from your income. Basically, the benefit is that you pay less tax now.
With a Roth IRA, you aren’t allowed to deduct your savings/contributions from your income. Instead, your contributions are taxed now and will grow tax-free. At retirement, you won’t pay taxes when you start withdrawing the funds.
If you’ve already started contributing to a 401(k) plan through your employer, you’re already investing in a tax-deferred retirement plan. Good for you! A Roth IRA is an excellent option to diversify your retirement savings, and it’s flexible too. You can withdraw your contributions (not earnings) without incurring a penalty. Contribute as much as $5,500 (or $6,500 if age 50 or above) annually, for all IRAs combined. But first, make sure you’re eligible for a Roth IRA.
To qualify for a Roth IRA, you must have “earned income” in the year you want to make a contribution. Earned income is money paid for work you performed, and includes wages, salaries, tips, bonuses, commissions, and self-employment income. Taxable alimony and military differential pay also qualify. Earned income does not include interest or investment dividends, rental property income, or pension payments. You can only contribute up to your earned income for that year. For example, if a 45 year old earns $2,500, they can only contribute up to $2,500 or if a 60 year old earns 10,000 their maximum contribution for the year is up to $6,500.
Since this just a broad overview of how IRAs work, take time to better understand how IRAs help you reach your retirement savings goals. We can answer all your questions at DCCU. You can even open an IRA online if you are already a Dane County Credit Union member! Then you can rest easy and move on to that mystery you’ve been meaning to read!