With the long-term solvency of social security still in question, it is becoming increasingly important to plan for self-sufficiency in retirement. Regardless of age, IRA’s are a valuable tool provided to enhance retirement savings.  IRA and 401k Rollover services are available through Wayne Westland Federal Credit Union.

IRA’s present substantial tax benefits compared to regular savings since the interest earned on contributions grows tax-free over the life of the account. Taxes on the actual  contributions also have significant advantages but differ depending on which type of IRA the account holder chooses.

There are two different IRA account classifications, and both have their distinct advantages.  When choosing between a traditional IRA and a Roth IRA, account holders should carefully consider their current financial circumstances as well as their long-term retirement goals and objectives.

Comparing a traditional IRA to a Roth IRA

The primary benefit of a traditional IRA is the ability to make contributions on a pre-tax basis.  This is a significant advantage when compared to a Roth IRA, where contributions are credited to the account after federal and state taxes have been deducted. The deposit limits for both types of IRA’s currently stand at $5000 per account holder.

The real value of a Roth IRA lies in its unique flexibility. Since contributions are made with after tax dollars, accumulated principal and earnings can be withdrawn tax free if taken after the age of 59 ½. Whether this feature proves to be advantageous will depend largely on the income tax rate that is in place when the account holder begins to receive disbursements.  With a Roth IRA, members will not have to worry about the uncertainty of future tax rates when they begin to withdraw retirement funds.

Non-penalized distributions for traditional IRA’s also begin at 59 ½, and mandatory withdrawals must be taken at 70 ½. Early withdrawals are subject to current tax rates as well as substantial penalties. This differs significantly from a Roth IRA, where contributions can be withdrawn at any point with no associated penalty. All withdrawals from a traditional IRA after 59 ½ are subject to the current tax rates.

Other Considerations

There is no single IRA solution that fits every circumstance. IRA accounts should only be created when tax consequences and retirement goals have been established. Wayne
Westland Federal Credit Union member service representatives can help sort through the different plan options that are available for you.