Advisors' Corner

IRAs are a great way to save for retirement while also offering potential tax benefits, either now or in the future. But is an IRA the right fit for your situation? Let’s break it down.

What is an IRA?

An Individual Retirement Account (IRA) helps you save for retirement with tax advantages. There are two main types:

• Traditional IRA: You contribute pre-tax money, which lowers your taxable income now. You’ll pay taxes when you withdraw the money after age 59½. Withdraw early, and you might face a 10% penalty.
• Roth IRA: You contribute after-tax money, so you don’t get a tax break now, but your money can grow tax-free, and withdrawals after age 59½ (if the account is at least 5 years old) are also tax-free.

Whether a Traditional or Roth IRA—or both—is right for you depends on your income, tax situation, and retirement goals. Here are five common scenarios where an IRA might be a smart choice.

1. Your Employer Doesn’t Offer a 401(k), or You’re Self-Employed

401(k) plans are popular because many employers offer matching contributions (free money!) and high contribution limits. But if you don’t have access to a 401(k), an IRA is a great alternative.

• Contribution Limits: In 2024 and 2025, you can contribute up to $7,000 to an IRA, with an extra $1,000 if you’re 50 or older.
• Self-Employed? You might want to look into a SIMPLE IRA or SEP-IRA, which allow for higher contribution limits than a traditional IRA.

No matter which IRA you choose, the tax benefits can put you ahead of saving in a regular taxable account. Be sure to talk with a tax advisor to find the best option for your situation.

2. You’ve Maxed Out Your 401(k)

If you’ve already contributed the maximum to your 401(k), you can still save more by contributing to an IRA.

• More Investment Options: IRAs typically offer a wider range of investments—like stocks, bonds, ETFs, mutual funds, and CDs—compared to most 401(k) plans.
• Tax Benefits: Depending on your income, you might still be eligible for tax deductions with a traditional IRA or tax-free growth with a Roth IRA.

3. You Could Use a Tax Break This Year

Contributing to a traditional IRA might lower your taxable income for the year, especially if you contribute before the tax deadline.

• Potential Savings: If your contributions reduce your taxable income enough, you might drop into a lower tax bracket, which can reduce how much you owe at tax time.
• Deduction Limits: If you or your spouse has a workplace retirement plan, your ability to deduct IRA contributions may phase out based on your income.

4. You Want Tax-Free Growth in the Future

If you don’t need the tax break now, a Roth IRA could be the better choice.

• Tax-Free Withdrawals: You pay taxes on contributions now, but your money grows tax-free, and you won’t owe taxes when you withdraw it in retirement.
• Wealth Transfer Benefits: Roth IRAs are also great for passing money to heirs, as withdrawals for beneficiaries are income-tax-free.
• Income Limits: Roth IRAs have income restrictions, so check if you qualify before contributing.

5. You Want Flexibility in Retirement

Having both a traditional IRA and a Roth IRA gives you more control over your taxes in retirement. This strategy, called tax diversification, allows you to choose where to withdraw money based on your tax situation.

• Example: Use taxable withdrawals from your traditional IRA for everyday expenses. For big purchases, like a new car, you can pull from your Roth IRA to avoid pushing yourself into a higher tax bracket.
• Flexibility: This mix can help manage your taxable income and reduce the amount of taxes you’ll owe in retirement.

Bottom Line

The decisions you make today about how you save for retirement will have a lasting impact for years to come. Whether you're considering a Traditional or Roth IRA—or both—it’s important to choose the option that best fits your financial goals.

To get personalized guidance on your retirement strategy, schedule a consultation with Michael Schimmel from Fellows Financial Group at ussfcu.org/fas. Michael can help you navigate your IRA options and create a plan tailored to your needs.

This article is for informational purposes only and should not be considered tax, legal, or financial advice. Individual circumstances vary, and you should consult a qualified tax advisor, financial planner, or legal professional to determine what options are best for your specific situation. While we strive to provide accurate and up-to-date information, laws and regulations may change, and we do not guarantee the completeness or accuracy of the content. USSFCU and its representatives do not provide tax or legal advice. Always review your retirement and investment plans with a professional before making any financial decisions.