You’ve likely heard it before, but it bears repeating: It’s never too early to start saving for retirement—even if that means starting small.
One of the best (and most popular) ways to do so is with an individual retirement account (IRA). An IRA is a tax-advantaged account that individuals contribute to directly, then watch grow well into their retirement years. There are a few options to choose from, so let’s take a look at the most popular options and what each has to offer.
Roth IRA: After-tax contributions, tax-free withdrawals
With a Roth IRA, you pay taxes on money going into the retirement account, but the money that comes out is tax-free. As long as you’re earning income, you can contribute to the account. If you anticipate being in a higher tax bracket at retirement age, a Roth IRA is worth considering.
For those who earn too much income to contribute to a Roth IRA, there’s the “backdoor Roth IRA” option (don’t worry, despite the name it’s a legitimate option). This actually isn’t a type of IRA but rather an alternative method allowing investors to make nondeductible contributions to a traditional IRA and then convert those funds into a Roth IRA.
Traditional IRA: Tax-deductible contributions, tax-deferred growth
With a traditional IRA, on the other hand, you contribute pre-tax dollars that grow tax-deferred until money is withdrawn during retirement. Earnings and gains are generally not taxed until the account holder begins taking distributions, which can begin at age 59½ but aren’t required until age 73.
Similar to the backdoor Roth IRA mentioned above, investors unable to make tax-deductible contributions to traditional IRAs due to high income may opt for a nondeductible IRA. This IRA still acts like a traditional IRA over time by growing tax-deferred until you make withdrawals. A nondeductible IRA can also be converted into a Roth IRA via the backdoor Roth IRA.
Additional IRA types to consider
- SIMPLE IRA. Short for Savings Incentive Match Plan for Employees, this IRA lets employees make direct contributions to their accounts. The employer is also required to feed the fund.
- SEP IRA. The Simplified Employee Pension (SEP) IRA lets business owners make contributions toward their employees’ retirement as well as their own retirement savings.
- Spousal IRA. A spousal Roth IRA is designed for unemployed or underemployed partners of working individuals to make contributions based on their working partner’s income.
Ready to start saving? Visit the Individual Retirement page to explore our IRA options. When it comes to tax implications, the different types of IRAs are nuanced, so be sure to consult a tax professional before making a choice. The good news is, an experienced LPL Financial Advisor* at SELCO Investment & Retirement Services is ready to help answer your questions and get you on the path toward your retirement goals.
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* Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. SELCO Community Credit Union and SELCO Investment & Retirement Services are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using SELCO Investment & Retirement Services, and may also be employees of SELCO Community Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, SELCO Community Credit Union and SELCO Investment & Retirement Services. Securities and insurance offered through LPL or its affiliates are:
| Not Insured by NCUA or Any Other Government Agency | Not Credit Union Guaranteed | Not Credit Union Deposits or Obligations | May Lose Value |
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