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These days, people are living longer than ever, which means retirements are lasting longer than ever. To make sure you have enough money, it’s important to start saving as soon as possible. And one way to do that is with an Individual Retirement Account, or IRA.
IRAs are not work retirement plans. You can open these accounts through an advisor and don’t need to go through your employer. It’s typically easy to set up your account– and you can allow your broker to have as much – or as little – control over your investments as you choose.
The IRS limits how much you can invest in an IRA each year. If you’re younger than 50, you can invest up to $5,500 into an IRA . If you’re50 or older, you can invest up to $6,500 a year.
Even better? When you add money to a Traditional IRA, you’ll get a tax deduction for your contribution. Now you’re saving money for the future while also bringing down this year’s tax bill. The Roth IRA doesn’t offer a tax deduction for your contributions.
You can start making withdrawals without penalty from your IRA as soon as you turn 59 ½, even if you’re not working. When you take a withdrawal from a Traditional IRA, you’ll owe income tax on the withdrawal. But with a Roth IRA, you already paid income tax on this money up front, so the withdrawal is tax-free. This means you’ll never have to pay income tax on your investment earnings if you are 59½ or older.
IRAs are retirement plans and that’s what the IRS wants you to use them for – at least until you turn 59½ . If you want to take money out before then, it counts as an early withdrawal. The IRS charges an extra 10 percent penalty on early withdrawals which can destroy your investment return. While there are a few special situations when you can avoid the penalty, like paying for excess medical bills and college expenses, generally once you put money in an IRA, you should try to keep it there until retirement.
Which is better for you? Compare the features of a Traditional and a Roth IRA.
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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.
Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax‐related decisions. For information about Protective Life and its products and services, visit www.protective.com.