If you’re nearing retirement and you’re looking to increase your contributions, you might be confused about the various accounts. The IRA is a common choice, but there are several types, and not all of them are suitable for everyone. When in doubt, speak to a financial advisor in California about your situation. They can come up with a customized retirement savings plan for you.
How Does an IRA Work?
Individual Retirement Accounts are tax-advantaged savings vehicles meant to provide individuals with income in retirement. There are four kinds, the traditional IRA, the Roth IRA, the Simplified Employee Pension IRA, and the Savings Incentive Match Plan for Employees IRA. The money you put in your IRA can’t be withdrawn until you are 59 1/2, otherwise, you must pay a 10% penalty.
The Traditional IRA
Contributions to a traditional IRA are tax-deductible. This means that your tax bill will be lower in the present, but you will still need to pay some tax during retirement when you withdraw your money. If you believe that you will have a lower income in the future, this type of IRA could be perfect for you. At the moment, the contribution limit for individuals is $6,000 per year or $7,000 for people over 50.
The Roth IRA
If you contribute to a Roth IRA, you must use after-tax dollars, so there is no tax advantage in the present. However, you won’t have to pay taxes when you withdraw your money. Therefore, this IRA is perfect for people who believe they will have a high income during retirement. Also, there are no required minimum distributions, and you can contribute to your Roth IRA no matter your age, as long as you have earned income.
The SEP IRA
The SEP IRA is designed for self-employed individuals such as freelancers or independent contractors. The contribution limit is higher since this IRA is designed to act as an alternative to an employer-sponsored pension like the 401(k). The tax rules are the same as those for the traditional IRA.
The SIMPLE IRA
The SIMPLE IRA is also meant for self-employed people and small business owners, and it has the same tax rules as the traditional IRA. Both employees and employers make contributions, which are tax-deductible. This means that the SIMPLE IRA could potentially push businesses and workers into a lower tax bracket, saving them a lot of money.
Should I Ask a Financial Advisor in California for Advice About Retirement?
Only around 35% of Americans use a financial advisor. But generic advice on the internet can only take you so far because it isn’t targeted to your individual situation. If you’re nearing retirement and you’re looking to optimize your situation, speaking to a professional is worth it. A good Fresno financial advisor can analyze your income, expenses, assets, and liabilities to figure out the best strategy and help you choose suitable retirement accounts.
Planning for retirement is crucial for individuals between 40-60. At that age, you are likely to have a high income, so you can contribute to various accounts, including your employer-sponsored pension, your health savings account, and your IRA. The best way to find out which retirement accounts are best for you is to find a financial advisor near you.