IRAs for retirement saving
Saving always involves a little sacrifice, but you can make it easier with the special tax benefits that come with IRAs.
The good stuff: Tax breaks
With a traditional IRA:
- You could get a tax deduction on the amount you contribute.
- But you'll pay income taxes on the money when you withdraw it.
So do you want to pay taxes now or later?
The smartest financial move is to pay taxes when they're the lowest. Of course, without knowing the future, you're guessing about when that will be.
If you're just starting your career, your income—and hence your taxes—might be pretty low. Compare that with the higher income you could be making in a few decades, and paying taxes now might look like a good deal.
But if you're pretty confident that your current income will be higher than your income in retirement, you might be better off delaying taxes until later.
What do others do?
In 2017, 63% of Vanguard clients chose a Roth IRA for their contributions.
Younger savers tend to choose a Roth IRA even more than older savers. In 2017, people under age 30 selected a Roth IRA 77% of the time.
Use a Roth IRA to plan for any scenario
Good to know!
If you have a traditional IRA already, you can convert it to a Roth IRA. (If you're rolling over traditional retirement plan assets, you can also choose to put them in a Roth IRA.)
Learn more about the 2 types of IRAs
There are other differences between Roth and traditional IRAs, and you should make sure you understand all the contribution rules and limits. We can break it down for you.
Do the math:
Putting money into an IRA at the beginning of the year (as opposed to waiting until the deadline) could mean an extra $15,000 when you retire. That's because your contributions will have extra time to grow!**
Once you've selected an account, you'll choose investments to hold in it—a step that can be as simple as you want it to be.
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Find the right account for you
WHERE DOES RETIREMENT FIT INTO YOUR PRIORITIES?
A type of IRA that allows you to make after-tax contributions (so you don't get an immediate tax deduction) and then withdraw money in retirement tax-free as long as you meet the requirements.
A type of account created by the IRS that offers tax benefits when you use it to save for retirement.
Contributions you can subtract from your income on your tax return, resulting in a lower tax bill.
The yearly, monthly, or weekly amounts you save in your account.
You won't pay any income taxes on the amount your account earns until you take the money out. (Note that with Roth accounts, assuming you meet all requirements, the earnings become tax-free at that time.)
Money you can take out of your account without owing any federal income tax, even if some of it has never been taxed.
The investment returns you accumulate on the savings in your account.