Opening a Traditional IRA or a Roth IRA with Spero can help you secure your retirement in one easy-to-use, easy-to-access location. Retirement planning with Spero is simple and straightforward — and we can work with you to make sure that you’re setting aside enough each month to fully fund your retirement by making your contributions automatic. But first, let’s cover a couple fundamental points about retirement planning:
The Basics of Retirement Planning
What is the biggest mistake you can make in planning for retirement? Easy: Not starting now. If you think you are too young or that you should hang on to every penny now in order to meet present needs, think again. If you are already staring down the barrel at retirement and think it’s too late to start, think again. If you have income, you can and should be saving for retirement, regardless of age.
The earlier you begin setting aside money for retirement, the more you benefit from compounding interest. What’s that? It’s the interest you earn, not only on the principle that you contribute, but also on the accumulating interest. In fact, you can invest less money over fewer years and have a larger nest egg than you might if you invest the same amount annually for a longer period but starting later in life.
I’m convinced! Where do I start?
There is no one-size-fits-all retirement plan. The right plan for you is largely determined by some combination of your age, your income level, and your anticipated tax bracket.
Spero is here to help you get started so you can secure your financial future during your retirement years. We offer easy, automatic transfers between accounts or automatic payroll deduction to help you be disciplined and consistent about funding your retirement.
In general, the most important decision to make is which kind of retirement account you need: a 401K, a Traditional IRA, or a Roth IRA. There are key differences between these accounts, and not everyone has all account types available to them.
The Difference Between 401K plans, Traditional IRAs and Roth IRAs
Does my employer offer a 401(k) or similar retirement plan?
If the answer is yes, it is a great idea to leverage this option. Many employers offer matching contributions that immediately double how much you are saving each year — with no effort from you! That’s free money in your pocket, and who doesn’t love that? Also, these programs invest with pre-tax dollars, generally allowing you to make larger annual contributions to your retirement, and offer you tax-free growth until you withdraw in retirement.
OK, no 401(k) through my employer. Or, there is one, but it’s no good. Or, I am self-employed. What are my options?
From here, you have two basic options: A Traditional IRA or a Roth IRA (named for the senator who created the plan). Which one best suits you is largely determined by a combination of your age, your income level, and your anticipated future tax bracket.
Let’s start with what the two have in common. Both the Traditional IRA and the Roth IRA are retirement savings accounts that offer compelling tax advantages.
In a nutshell, the key difference is when each of them offers the tax advantage. The Traditional IRA offers a tax break at the time of contribution; the Roth IRA offers the break at the time of withdrawal. With both plans, your money grows tax free as long as it remains in the account.
How To Choose Between a Roth and Traditional IRA
If your income is higher now, and you think you may be in a lower tax bracket at the time of retirement, a Traditional IRA is probably better for you.
Anyone under the age of 70 ½ can contribute to a Traditional IRA, regardless of income. Not only that, contributions are eligible for a tax deduction during the year you contribute.
On the flip side, there is a penalty for withdrawing funds from your IRA before age 59 ½ — a hefty 10% early-withdrawal penalty. Ouch.
In addition, once you reach 70 ½ you will be required to withdraw at least a minimum amount each year. All that said, if you are doing well financially now, and think that you may drop into a lower tax bracket by retirement (and hopefully will not need to touch that money early), a Traditional IRA might be just the thing for you.
If you are younger and your income is moderate or low right now, you might be better off with a Roth IRA.
Not everyone is eligible to open a Roth IRA — there are income restrictions. For 2018, that limit is $120,000 if you are single or head of household and $189,000 if filing jointly. But these numbers fluctuate from year to year.
The Roth IRA restricts the amount of your annual contribution and is taxed before it goes into the account. If you follow the guidelines, future withdrawals from your Roth IRA are tax and penalty free. This feature makes the Roth IRA an especially great choice if you think you may need that money before retirement.
Another great benefit to the Roth IRA is that there are no mandatory withdrawal guidelines, which allows your money to continue growing for longer. It also lets you leave it in place for your heirs (tax free) if you so choose.
Lastly, a really cool thing about the Roth plan is that, because you already paid Uncle Sam his share before you made your contributions, you won’t need to pay him again when you withdraw funds. This is a great benefit if your tax bracket at the time of retirement is higher than at the time of contribution.
Spero will walk you through the process of choosing the right type of retirement account and help you determine a solid annual contribution. Regardless of which type of retirement program you choose, financial planners advise you to contribute the maximum amount annually that you are allowed.
By opening a retirement account with us, you can take advantage of the lower fees and competitive interest rates offered through credit unions as compared to banks and brokerages. Call us today or visit one of our branch locations to start planning for those wonderful retirement years.
This material is for educational purposes only and is not intended to provide specific advice or recommendations for any individual. Consult a tax advisor for more details.