• Money Management Planning for Your Future
  • IRAs and You: A Simple Guide to Getting Started

  • 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.

    Setting Up an IRA

    IRAs are not work retirement plans. You can open these accounts through a broker 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.

    There are two types of IRAs - a Traditional or a Roth. In most cases, traditional is better for taxes when you are still working, while Roth is better during retirement.


    Which is better for you?
    Compare the features of a Traditional and a Roth IRA.

    Traditional IRA Roth IRA
    Income limits Income limits only for individuals with retirement plans at work. Otherwise, there are no income limits Individuals with certain incomes are not eligible for Roth IRAs
    Tax status during contribution phase In most cases, contributions are tax deferred.Earnings are tax-deferred Contributions are made with post-tax dollars
    Tax status during distribution phase Withdrawals and earnings are taxable Withdrawals and earnings are generally tax-free
    Distributions
    Eligible at 59½ Eligible at 59½ as long as contributions have been held for 5 years (from January 1 of the year of first contribution)
    Tax status during distribution phase Withdrawals and earnings are taxable Withdrawals and earnings are generally tax-free
    Withdrawal for home down payment Can withdraw up to $10,000 for the down payment on the purchase of your first home with certain restrictions Can withdraw up to $10,000 for the down payment on the purchase of your primary home provided you have not owned a home in the previous 24 months and you have held the IRA for a minimum of 5 years. Certain other restrictions apply.
    Withdrawal for education expenses Can withdraw for qualified higher education expenses of owner, children and grandchildren
    Withdrawal for medical expenses Can withdraw for qualified, unreimbursed medical expenses provided they exceed 7.5% of your adjusted gross income. You can also withdraw for medical insurance if you are unemployed or disabled.
    Potential withdrawal penalties Withdrawals before 59½, if not because of an allowable exception, may be subject to 10% early withdrawal penalty. Withdrawal of earnings before 59½, if not because of an allowable exception, may be subject to 10% early withdrawal penalty. Any earnings are also taxable. Contributions can be taken out early without taxes or penalties.

    Contributions

    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’re 50 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.

    Taxes on Withdrawals

    You can start making retirement withdrawals 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.

    Early Withdrawals

    IRAs are retirement plans and that’s what the IRS wants you to use them for – at least until you turn 59 1/2. 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.

    Are you saving enough? See how you compare with other households:


    Source: LIMRA, Consumers’ Retirement Perspectives, Fourth Quarter 2012


    39% of US households use an IRA as part of their retirement plans.


    1IRAs include traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs,and SIMPLE IRAs)
    2Employer-sponsored retirement plans include DC and DB retirement plans.

    Sources: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey and U.S. Census Bureau

  • Protective Life Insurance Company does not recommend or endorse any particular investment option and does not provide investment advice, legal or tax advice. When considering your options with your agent and financial planner, you will also want to consult your attorney or tax advisor about your specific needs.

  • Understanding Your IRA options.

    At Protective, we believe that the more you understand about retirement options, the better you can plan and achieve your retirement goals. That’s why we provide information on IRA plans, including Roth and Traditional IRAs. You’ll also find other information on this website and in our social channels to help you educate yourself about retirement options.