What is an IRA?

If you’ve been looking in to ways to save for retirement, you may have been advised to consider opening an IRA (individual retirement account), and no wonder – after all, IRAs are a great way to do so, and they offer important tax advantages. But before opening an IRA as your next financial step, you should know there are a number of different kinds of IRAs, and it’s important to understand their differences. To help get you started, we’ve assembled the following points we hope will be a basis for your IRA decision, and get you moving forward towards your retirement goals.

What is an IRA?

An Individual Retirement Account, or IRA, is one of the smartest and most tax-efficient ways for individuals to save for their retirement.  IRAs allow for tax-deferred investments into the future. Different types of IRAs have different rules and offer different tax advantages. We'll take a deeper look at some of the main types of IRAs.

What is a Traditional IRA?

With a traditional IRA, you make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement. Many retirees find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate. With this option, individual taxpayers can contribute 100% of any earned compensation up to a specified maximum dollar amount. In most cases, individuals are allowed to save up to $7,000 per year. As long as you meet the criteria, any money you save in a traditional IRA is tax-deductible. In other words, the more you save, the less taxes you’ll owe next year.

It is important to note that generally if you decide to withdraw money from an IRA before the age of 59 ½, you may be subject to an early withdrawal penalty of 10%. That is why you should always consult with a trusted tax advisor when considering a withdrawal from a retirement account.

What is a Roth IRA?

A Roth IRA allows you to make retirement contributions with money you've already paid taxes on (after-tax), and your money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met. There are contribution limits and income limits you need to be aware of when considering a Roth IRA, but this option also has some great benefits, such as no required minimum distributions in retirement.

Just like with a traditional IRA, Roth IRAs carry a $7,000 annual contribution limit and will also be subject to early withdrawal penalties and tax implications if money is taken out before the age of 59 ½. 

What are IRAs for the self-employed?

If you are a small business owner, or are self-employed, you may want to take advantage of a SIMPLE or a SEP IRA. There are important distinctions between the two, but both allow the business owner the option to save for their retirement, and the retirement of their employees in tax-advantaged ways.

We should definitely mention that one of the best features of an IRA, compared with a workplace retirement plan like a 401(k), is the larger selection of account type choices. For example, bank Certificates of Deposit (CDs) and savings accounts can be structured as an IRA. You can also open an investment account* that allows you to pick individual stocks, mutual funds or ETFs*.

Ready to Open Your IRA?

If you take action and start an IRA now by contacting your local financial institution, you could see major growth in your savings by the time you do decide to retire. If starting an IRA sounds like the right option for you, our team would be happy to help walk you through the process and answer any questions you may have. Reach out to one of our professionals today to see how we can help you reach your goals.

This article contains general information only. Sunflower Bank is not, by means of this article, rendering accounting, financial, investment, legal, tax, or other professional advice or services. We suggest you consult your personal tax or legal advisor before making tax or legal-related investment decisions.

* Investment and insurance products are not FDIC-insured, are not a deposit or other obligation of, or guaranteed by the bank or an affiliate of the bank, are not insured by any federal government agency and are subject to investment risks, including possible loss of the principal amount invested.