Which IRA is Right for You in 2021?
Jan 1, 2021
Isn’t it always the right time of year for a tax break? Individual Retirement Accounts (IRAs) give you many choices and can help you keep more of your hard-earned money. The key questions are, should you go with a Traditional IRA or Roth IRA? Or add a 529 college savings account?
FIRST, CONSIDER YOUR STAGE IN LIFE
When you are starting your career, put the magic of compounding interest to work for you. No matter how small your initial contributions are, you will thank yourself later for making them. There are important differences between the Traditional IRA and the Roth IRA.
For example, the Roth IRA gives you the ability to invest your after-tax dollars today and to let the investment grow tax-deferred. You may also have the option of making tax- and penalty-free withdrawals from your account. If you’re getting married, having a child, saving to buy your first home, or closing in on retirement, it can absolutely pay to speak to a professional tax adviser to help maximize your funds.
YOU MAY PREFER A MANAGED IRA ACCOUNT
It’s the type of account that selects a group of investments in a portfolio for its investors. You may own the money you invest, but the account is overseen by a professional money manager, who may buy, sell , and trade assets without individual investor approval. Review some of the top managed IRA accounts, and you will see higher and lower returns as well as higher and lower commissions and costs for participating in the account. Your ability to tolerate risk is something to consider, depending on your stage of life.
READY TO MANAGE YOUR OWN INVESTMENTS?
This is not rocket science, but you will need solid financial knowledge. This means knowing the basics of stock and bond market investing. As you probably know, stock and bond prices bounce around in the short term, so managing your retirement this way may not be for the faint of heart. Essentially, you need to have a deep understanding of the companies and funds you are investing in. But if you are a knowledgeable and savvy investor, you can save on administrative costs by managing your own investments. Plus, by being more nimble with large funds or investment options, you may be able to capitalize on timely opportunities.
You can also make the decision to hire a financial adviser to help you make decisions. This could cost you one percent or more of your investments,This option could come with fees, but a successful adviser could be well worth the investment. That said, as a Honda FCU member, you can choose to set up a no-pressure, no-obligation meeting with a proven financial professional from our MEMBERS Financial Services team, offered through CUNA Brokerage Services, Inc.
TRADITIONAL OR ROTH IRA. OR BOTH?
If you choose a traditional IRA, the money you contribute may be tax-deductible. For example, if you contribute $5,000, that money won’t be taxed at your current income rate. This also lowers your taxable income. A traditional IRA may also be a good option if you need to roll over assets from an employer-sponsored retirement plan.
With a Roth IRA, you have the potential for tax-free withdrawals in retirement. A Roth IRA also offers you the flexibility to withdraw your money without paying taxes and penalties. A combination of both IRAs could be right for you. There are also many educational savings plans, commonly called 529 plans, to consider. To learn more about all these options, speak to a tax adviser for details.* Of course, Honda FCU offers members a range of IRAs and educational savings plans.
BEFORE YOU MAKE CHOICES, VISIT OUR FINANCIAL LEARNING HUB
Honda FCU offers a library of videos on everything from “Retirement 101” to “Growing Your Investments” and more. Watching any number of these videos could help prepare you to meet with a financial adviser. Of course, if you want practical advice now, speak to a Honda FCU adviser today.
*Note: Withdrawal of IRA earnings prior to age 59 ½ may be subject to ordinary tax and a 10% penalty.