Contributing to IRAs

Contributing to an Individual Retirement Account (IRA), whether it’s a Traditional IRA or a Roth IRA, can be a powerful way to save for retirement. Both types offer distinct tax advantages that can help grow your retirement savings more efficiently, but they do so in different ways that can be more beneficial depending on your current financial situation, future income expectations, and retirement plans. Here’s a breakdown of the benefits of contributing to either type of IRA:

Traditional IRA Benefits

1. Tax-Deductible Contributions: Contributions to a Traditional IRA may be fully or partially tax-deductible, depending on your income, filing status, and whether a retirement plan at work covers you or your spouse. This upfront tax break can lower your taxable income for the year you make contributions.
2. Tax-Deferred Growth: Investments in a Traditional IRA grow tax-deferred, meaning you don’t pay taxes on investment gains, dividends, or interest until you withdraw the money in retirement. This can allow your investments to grow more quickly than they would in a taxable account.
3. Flexible Contributions: You can contribute to a Traditional IRA even if you participate in a workplace retirement plan, although your contributions may not be deductible.
4. Age and Income Limits: There are no income limits on contributions to a Traditional IRA, though there are limits on tax-deductible contributions. Also, recent changes have eliminated the age limit for contributions, allowing individuals over 70 ½ to continue contributing if they have earned income.

Roth IRA Benefits

1. Tax-Free Withdrawals: Roth IRA contributions are made with after-tax dollars, meaning withdrawals in retirement (both contributions and earnings) are tax-free as long as certain conditions are met. This can be especially beneficial if you expect to be in a higher tax bracket in retirement.
2. No Required Minimum Distributions (RMDs): Unlike Traditional IRAs, Roth IRAs do not require you to start taking distributions at a certain age, allowing your account to continue growing tax-free throughout your lifetime. This can also be a valuable estate planning tool.
3. Withdraw Contributions Anytime: You can withdraw your contributions (but not your earnings) from a Roth IRA at any time without taxes or penalties. This can provide some financial flexibility before retirement.
4. Income Limits: Roth IRA contributions are subject to income limits, meaning high earners may be phased out from contributing directly. However, “backdoor” Roth IRA contributions provide a workaround for those over the income limits.

Unexpected Benefits from 529-to-Roth Rollovers

In 2024, an unexpected opportunity arises from the SECURE Act 2.0 for those with 529 college savings accounts, allowing a double tax break for 529-to-Roth IRA rollovers. This unique chance enables account holders to execute two rollovers in a single year, providing a potential boost to their Roth IRA savings under certain conditions. For more information regarding this opportunity, visit InvestmentNews.com.

It’s important to note that these rollovers must be done as a direct trustee-to-trustee transfer to the 529 plan beneficiary’s Roth IRA to avoid taxes and penalties. Also, while the rollover offers a way to utilize unused 529 funds without tax implications, ensuring compliance with all conditions is crucial to avoid unintended tax consequences.

In conclusion, both Traditional and Roth IRAs offer valuable benefits that can help you build your retirement savings. Consider your current financial situation, your future income expectations, and your retirement goals when choosing which IRA is right for you. It’s also a good idea to consult with a financial advisor to make the most informed decision based on your personal financial situation.

ProducersXL offers products from several carriers with flexible premiums, which you can add to the account monthly or annually.  Please call or email Scott Sandquist for more information on ways to contribute to a Traditional IRA or a Roth IRA.