Our blog today continues on the theme of 401(k)s and IRAs. It is our intent to help you understand these forms of investment accounts and let you know there is help for those who need it. These accounts are well established and used extensively in retirement planning. However, there are numerous rules, regulations and requirements that can easily overwhelm the average investor, yet savers/taxpayers need to be aware of how to use them appropriately without running afoul of the rules. As with the 401(k), we want to emphasize how professional guidance can make a huge difference in using these tools most effectively. Our blog dated 1-22-21 highlighted Fee-Only CFP® professionals and the Accredited Investment Fiduciary (AIF®) as knowledgeable and reliable resources in your 401(k) or IRA, but you should make certain the advice you get is from a truly independent fiduciary investment advisor.
An IRA, just like a 401(k), is not an investment in and of itself, but an account that is a holder for investments. If your employer does not offer a 401(k), or for some other reason you do not have access to a 401(k) plan, the IRA is an alternative available to start your own retirement investment and receive tax benefits.
The IRA allows you to contribute money to your account while deferring taxes on the earnings and growth of your savings until you take the money out. There are several types of IRAs available:
- Traditional IRAs – Contributions are tax-deductible. Upon retirement, withdrawals are taxed as income.
- Nondeductible Traditional IRAs – Traditional IRA, but contributions are not tax-deductible and are, therefore, made with after-tax dollars.
- Roth IRAs – Contributions are made with after-tax dollars (not tax-deductible), but earnings and eligible withdrawals are tax free.
- Simplified Employee Pension IRAs (SEP-IRAs) – Allows a small busines or self-employed individual to make retirement plan contributions into a traditional IRA established in the employee’s name.
- Simple IRAs (Savings Incentive Match Plans for Employees) – Available to small businesses with no other retirement plan, allowing employer and employee contributions. Similar to a 401(k), but simpler, less costly administration and lower contribution limits.
The type of IRA account you select should be matched carefully to your specific, individual circumstances and desired outcomes, as well as how much you are able to, or permitted to, contribute. These are some of the reasons the knowledge, experience and fiduciary status of an independent fiduciary investment advisor may be invaluable to average employees unfamiliar with how and when to use these different tools. As a Fee-Only CFP® professional firm, this expertise may be just the solution you need for your worthwhile living plan.
Have a great weekend!