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Saving in your employer's plan is a great step toward building your dream retirement. And in most cases, you can also contribute to an IRA. Saving in both can make you better prepared for retirement. It’s good for your family, too. Find out why in this article.
Most people qualify to open an IRA
If you know the rules, almost anyone can open an IRA, including:
- Workers of any age with earned income.
- Spouses with or without earned income.
- Children with income (for example, from a summer job or a college work-study program).
Why are IRAs important?
It’s hard to save all you need for retirement. The money you put in an IRA can give you extra retirement savings. This is especially useful when you save the maximum amount in your employer’s plan. And if you’re one of the many workers who simply doesn’t have access to a workplace retirement plan, an IRA can be your best option to save for retirement.
There is a limit to IRAs, however
Currently, you can save $7,000 per year in an IRA and $8,000 if you’re age 50 or older.
Understand the two IRAs, then decide
There are two main types of IRAs—traditional and Roth. With one you pay taxes now, and with the other you pay taxes later.
Traditional IRA contributions may be tax-deductible
When you make a tax-deductible contribution to a traditional IRA, you don’t owe taxes on the money until you withdraw it, presumably in retirement.* That means your contributions and any earnings can grow tax-free until you withdraw them.
With Roth, you pay taxes now—but not later
You make contributions to a Roth IRA with money you’ve already paid taxes on, so there is no immediate tax break. However, the payoff comes later.***
When you withdraw Roth contributions or earnings, you won’t owe any federal tax if you meet two conditions:
- You’re at least age 59½.
- You made your first Roth contribution at least five years before.
Which should you choose?
You can find the current IRA income limits here.
Other factors, such as your age and potential tax consequences, can also influence whether you choose a Roth or a traditional IRA.
You can find a detailed comparison here.
Or, call 800-551-8631 and speak with one of our IRA specialists.
**You may be eligible to deduct some or all of your traditional IRA contributions. If you or your spouse are covered by a retirement plan at work, the amount you can deduct may be reduced or eliminated.
***Withdrawals from a Roth IRA are tax-free if you are over age 59½ and made your first Roth contribution at least five years before; withdrawals of earnings taken before age 59½ or five years may be subject to ordinary income tax, a 10% federal penalty tax, or both.
Give your child a financial boost with an IRA
If your child earns income—perhaps as a camp counselor or from a college work-study job—they can contribute to an IRA. Often, parents set up the account and make the first contributions to help their child get started.
You and the child can contribute as much as the child has in earned income (up to the IRA maximum of $7,000 a year for those under age 50).
For example, Suzanne’s 18-year-old son, Robby, earns $4,000 per year between his lifeguard job and his work-study job at the college library. Suzanne opens a Roth IRA in his name and contributes an amount equal to his full earnings each year for five years.
If Robby’s IRA earned 6% annually, that $20,000 in Roth contributions would be worth more than $250,000 by the time Robby is age 67*—more than most Americans have in retirement savings after working their entire lives.**
*This hypothetical example does not represent the return on any particular investment, and the rate of return is not guaranteed. The final account balance does not reflect any taxes or penalties that may be due upon distribution. Withdrawals of earnings from a traditional IRA before age 59½ are subject to ordinary income tax plus a 10% federal penalty tax unless an exception applies. Withdrawals of earnings from a Roth IRA before age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.
**Vanguard, How America Saves 2023.
Save through a spousal IRA
To prevent married couples from getting too far behind in saving for retirement, Congress created a special type of IRA called the spousal IRA. This allows a spouse who is not earning money to continue to save for retirement without losing the tax advantages of an IRA.
Enhance retirement savings with a spousal IRA
You can contribute to a spousal IRA on behalf of a nonworking spouse based on how much the working spouse makes.
Although either spouse can contribute, a spousal IRA isn’t a joint account. It’s a separate IRA in the name of the spouse who has little or no earned income; it belongs exclusively to that spouse. You must be married and have filed a joint tax return to open a spousal IRA.